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 4.25%. It also lowered the other key interest rates by the same amount. Six members voted in favour of this decision, and one member voted for lowering rates by 0.5 percentage point.
The decision is underpinned by the summer (August) macroeconomic forecast and by an assessment of information obtained since it was prepared.
Inflation has been close to the 2% target since the beginning of this year. Price stability thus persists 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 4.25%. This has moderated monetary policy restriction. Moreover, foreign and domestic long-term rates have declined substantially in recent months. This represents a further easing of monetary conditions. 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.
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 maintain inflation near the 2% target in the long term.
Economic developments
In line with our expectations, the Czech economy is recovering only slowly and remains below its potential. GDP rose by 0.3% quarter on quarter and 0.6% year on year in 2024 Q2. Corporate fixed capital investment in particular contributed to the growth, while household consumption grew moderately (0.2% quarter on quarter). It was still 5.2% below the level observed before Covid. With inflation falling, real household income growth is recovering. However, it is being counteracted by negative sentiment. The recovery in domestic demand is thus slow, which is also confirmed by the retail and services sales figures. External demand also remains subdued.
The labour market tightness is easing slowly, but unemployment remains low. Average wage growth stood at 6.5% in 2024 Q2 and slowed compared to 2024 Q1. It remains elevated from a historical perspective, but real wages are 5% below pre-Covid levels. The risk of a wage-price spiral does not seem to be materialising.
Inflation has been close to the CNB’s target since the beginning of this year. Headline inflation was slightly above the summer forecast in July and August, mainly due to faster growth in food prices. Core inflation was also higher than forecasted, confirming the appropriateness of the cautious approach to rate cuts.
A temporary increase in inflation towards the upper boundary of the tolerance band around the target can be expected at the end of this year due to base effects. Inflation will decrease at the start of next year and fluctuate close to the CNB’s 2% target.
Risks and uncertainties
The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target 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 is an additional upside risk. 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. This is also reflected in the outlook for further rate cuts by major central banks.
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.