Minutes of the Bank Board meeting on 19 December 2024

Present at the meeting: Aleš Michl, Jan Frait, Eva Zamrazilová, Karina Kubelková, Jan Kubíček, Jan Procházka, Jakub Seidler

The meeting opened with a presentation of the eighth situation report based on an assessment of the information obtained since the autumn forecast was drawn up. Consistent with the forecast was a continued decline in short-term market interest rates initially, followed by broadly stable rates from mid-2025 onwards.

The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as modestly inflationary overall. In the Board’s discussion of the current and future monetary policy stance, Aleš Michl pointed out that core inflation was still elevated and was not safely below 2% at the forecast horizon either. Nor was the momentum of services price inflation falling. For these reasons, Aleš Michl proposed that the interest rate reduction process be paused for the time being. There was a consensus among the board members that the current monetary policy stance was still restrictive. In the context of the current inflation risks, a majority of the Board agreed that the reduction of monetary policy rates should be paused for the time being.

The Board also discussed prices in detail. The higher-than-forecasted inertia of services price inflation was repeatedly referred to as a significant upside risk to inflation. According to Jan Procházka, services prices were still rising at a pace that was not compatible with fulfilling the 2% target from the long-term perspective. This was partially a consequence of the previous high inflation and partly a reflection of steadily rising wages. Eva Zamrazilová regarded the extent to which Czech households would be willing to absorb higher prices in services as a key factor. Data on net wages were meanwhile indicating that at least 60–70% of households had enough money and were capable of further increasing these price pressures by changing their consumption behaviour and redirecting their spending from goods to services. Jan Procházka noted the consumption of Czech households was gradually rising. In addition to higher growth in Q3, food services sales based on data from point-of-sale systems had been up approximately 2–4% year on year in November and December 2024, despite having recorded increased growth at the end of 2023 due to an expected VAT increase in January 2024. Also in the context of the faster wage growth seen in Q3, Jakub Seidler said that although Czech households were not generally strong wage bargainers, the upward pressure on wages from households was likely to rise gradually due to efforts to compensate for the losses caused by the high inflation in past years. On the other hand, Jan Procházka said that the wage growth observed in Q3 had been lower than predicted by the summer forecast. Based on wage surveys, companies have wage increases of only around 4.5–5% in their budgets for 2025. According to Karina Kubelková, the latest observed wage data had moreover been strongly affected mainly by a legislative change (the introduction of mandatory registration of contracts for the performance of work), not by a change in fundamentals. She conversely saw a risk of higher-than-expected pay growth in the public sector, primarily connected with the upcoming parliamentary elections.

A majority of the board members also commented on global food and agricultural commodity prices. Karina Kubelková felt this was a case of temporarily increased volatility that would increase the inflationary pressures in food prices in the short term, not a long-term trend based on structural factors. According to Eva Zamrazilová, the extent to which food industry producers would pass on their higher supply chain costs to end-user prices would play a significant role. In 2024, food prices had offset the high services inflation, whereas in 2025 Q1, food prices themselves were to go up by as much as 5% according to the forecast. Jakub Seidler noted that the highly subdued food price inflation in 2024, which had even been negative at the start of the year, had differed significantly from the situation in other EU countries. The expected rapid growth in global food and agricultural commodity prices would therefore be joined in 2025 by a base effect pushing annual food price inflation further upwards.

In the debate of the upside risks to inflation, the board members also discussed property market developments. Jakub Seidler pointed out that imputed rents, which had had a downward effect on headline inflation throughout 2024, could record year-on-year growth of around 3–4% from March onwards due to base effects. Eva Zamrazilová generally questioned the categorisation of real property as a capital good. One can hardly speak of price stability when house prices are rising by 5–10% a year. It would be necessary to differentiate what proportion of properties are used directly for consumption, as housing is a basic necessity of life, and what proportion are capital assets intended to preserve the value of savings in times of relatively high inflation and low mortgage rates. According to Jan Kubíček, too, house price growth was accelerating much more quickly than we had originally thought. In his opinion, it was additionally hard to determine exactly to what extent the current trend in the property market reflected the realisation of deferred demand from 2022 and 2023 and to what extent people were making speculative purchases motivated primarily by expectations of capital gains. Against this, Karina Kubelková commented that the house price trend would only have potential major impacts beyond the forecast horizon. According to Jan Frait, too, the domestic credit growth and asset price indicators could be interpreted as meaning that quite a broad equilibrium persisted, requiring only very fine tuning.

By contrast, the board members felt that worse global economic activity and weaker output of the German and, in turn, Czech economy would foster lower inflation. Jan Frait would therefore not be surprised if a persisting negative output gap coupled with a widening interest rate differential against the euro were to move the path of short-term market interest rates down even further in the next forecast. On the other hand, Eva Zamrazilová noted that the worse foreign outlooks also reflected a whole range of structural changes, such as deglobalisation and decarbonisation, which conversely – as negative supply and cost factors – had some inflationary potential. She therefore saw this downside risk as only a moderate one. Jan Kubíček and Jakub Seidler were of a similar opinion, stating that the structural issues and stagflation tendency in the economy were creating a monetary policy dilemma. Nonetheless, in view of the mandate of the CNB, whose sole primary objective is to maintain price stability, they emphasised the need generally to keep interest rates on the high side in a context of persisting inflation risks. Jan Frait also pointed to the ongoing dichotomy where economic activity and demand remained at a weak level, but the labour market, wage growth and some components of inflation were not entirely consistent with that. In his opinion, the expected new economic policy actions of the USA, which could attract foreign capital and put the dollar under appreciation pressure, were also making the macroeconomic situation less clear. Karina Kubelková and Jan Procházka also commented that the worse economic outlook for the euro area was simultaneously reflected in a lower outlook for foreign 3M EURIBOR interest rates. The market expectations of a decline in ECB rates were thus gradually coming true, although this shift was reduced by expert judgement in the forecast, otherwise the domestic interest rate path would imply a need for a larger rate cut. Jakub Seidler conversely viewed this risk as less significant because of the high volatility of the market outlooks for ECB and Fed interest rates in 2024. Jan Kubíček meanwhile pointed to the pitfalls of directly comparing domestic and euro interest rates, as the ECB was pursuing unconventional monetary policy in the form of quantitative tightening, while the CNB was not.

At its meeting, the Bank Board left interest rates unchanged. The two-week repo rate remains at 4%, the discount rate at 3% and the Lombard rate at 5%. Five members voted in favour of this decision: Aleš Michl, Jan Frait, Eva Zamrazilová, Jan Kubíček and Jakub Seidler. Two members, Karina Kubelková and Jan Procházka, voted for lowering rates by 0.25 percentage point.

Author of the minutes: Martin Motl, Monetary Department