Statement of the Bank Board for the press conference following the monetary policy meeting
Decision
At its meeting today, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 4.5%. It also lowered the other key rates by the same amount. All seven board members voted in favour of this decision.
The decision is underpinned by a new macroeconomic forecast. The forecast implies a modest decline in short-term market interest rates.
Inflation has been close to the 2% target since the beginning of this year. It was even exactly 2% in February, March and June. Price stability was thus restored in the Czech Republic.
The CNB started lowering interest rates cautiously in December 2023. However, the fight against inflation is not over. The key repo rate has gradually fallen from 7% to 4.5%, i.e. by 2.5 percentage points. This has moderated monetary policy restriction.
Monetary policy nonetheless remains tight. Real interest rates are positive and are dampening lending activity, and hence the creation of money in the economy, and, in turn, inflation.
The Bank Board still sees some inflationary pressures in the economy. A strengthening of those pressures would mean that inflation would diverge for longer from the target towards the upper boundary of the tolerance band in the quarters ahead. Therefore, the Bank Board considers it necessary to persist with tight monetary policy and carefully consider any further rate cuts, approaching them with great caution.
At its meetings ahead, the Bank Board will base its decisions on an assessment of newly available data and their implications for the inflation outlook. Its considerations about the interest rate settings will depend mainly on an evaluation of the persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy, an analysis of the tightness in the labour market, the evolution of domestic and external demand, and the actions of key foreign central banks. The Bank Board will also assess the transmission of interest rate cuts to lending activity, asset prices and subsequently real economic activity.
The Bank Board states that the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive as rates approach their neutral levels.
The Bank Board confirms its determination to continue its tight monetary policy in order to stabilise inflation near the 2% target in the long term.
Economic developments
According to the CZSO’s flash estimate, GDP rose by 0.3% quarter on quarter and 0.4% year on year in 2024 Q2. External demand and above all household consumption both contributed to the year-on-year growth. With inflation falling, real household income growth is recovering.
However, according to our analyses, the economy is still below its potential and domestic and external demand remain weak. A stronger recovery is being counteracted mainly by subdued household and corporate confidence in the economy.
The labour market tightness is easing slowly, but unemployment remains low. Average wage growth stood at 7% in 2024 Q1. It remains slightly elevated from a historical perspective. This growth has so far been absorbed by profit margins and is not inducing further price increases. The risk of a wage-price spiral thus does not seem to be materialising.
Outlook
The Monetary Department’s forecast expects inflation to fluctuate around 2% in the months ahead and temporarily rise somewhat at the close of the year due to base effects. It will thus average 2.2% this year and 2% next year. Core inflation will remain elevated. It will average 2.5% this year and fall to 2.3% next year.
According to the forecast, Czech GDP will grow by 1.2% this year and economic growth will accelerate to 2.8% next year. We expect above all household consumption, which is still below the pre-Covid level, to rise gradually.
Risks and uncertainties
The Bank Board assessed the risks and uncertainties of the forecast as broadly balanced overall. Increased wage demands in the private and public sector are an inflationary risk. Potential excessive growth in total public sector spending would also lead to a risk of the state budget having an inflationary effect. Higher-than-expected inertia in services inflation and a halt in tradables disinflation, which has so far been due mainly to fading supply-side problems, are additional upside risks. An inflationary risk in the longer term is a potential acceleration of money creation in the economy stemming from a significant recovery in lending activity, especially on the property market. By contrast, a downturn in global economic activity and weaker German – and hence Czech – economic output are a significant downside risk to inflation. The future monetary policy stance abroad remains an uncertainty of the outlook.
Statutory mandate
The Bank Board assures the public that the CNB’s actions will be sufficient to maintain price stability in accordance with its statutory mandate. In addition, the Bank Board is ready to react appropriately to any materialisation of the risks of the forecast.