Statement of the Bank Board for the press conference following the monetary policy meeting

Decision

At its meeting today, the Bank Board kept interest rates unchanged. The two-week repo rate thus remains at 4%. Five members voted in favour of this decision, and two members voted for lowering key rates by 0.25 percentage point.

Today’s decision reflects the updated inflation outlook and its risks and an assessment of new data. According to the Monetary Department’s updated forecast, inflation will be slightly above the 2% target from 2025 Q2 until the end of 2026. The disinflation process in the core components of the consumer basket, especially in the services sector, is not yet completed. For these reasons, the Bank Board decided to pause the interest rate reduction process for the time being.

This decision aims to stabilise headline inflation close to the 2% inflation target in the long run. This requires growth in the quantity of money in the economy not to accelerate excessively and lending activity to remain moderate. By ensuring this, monetary policy will help reduce inflation further.

The CNB expects inflation to rise temporarily in the short term owing to renewed growth in food prices and to base effects. This will not jeopardise price stability, as, according to the Monetary Department’s updated outlook, headline inflation will return to the upper half of the tolerance band early next year. This will be aided by significantly slower growth in administered prices.

The CNB started lowering interest rates in December 2023. The key repo rate has gradually fallen from 7% to 4%. 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, long-term inflation.

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, and the evolution of domestic and external demand. The Bank Board will also monitor the actions of key foreign central banks and geopolitical events. It will also assess the transmission of interest rate cuts to lending activity, asset prices and subsequently real economic activity and prices.

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

GDP rose by 1.3% year on year in Q3, in line with the forecast. The growth was driven by domestic demand, in particular household consumption. External demand remains weak. This, together with subdued sentiment, is leading to low investment activity of companies.

The labour market tightness is easing slightly, but the unemployment rate remains low. Average wage growth stood at 7% in Q3, almost one percentage point higher than expected.

Inflation has been close to the CNB’s target since the beginning of this year. Headline inflation has developed broadly in line with the forecast in recent months. In particular, growth in services prices remains elevated, reflecting rapid wage growth. Renewed growth in food prices, which is still moderate from a historical perspective, has contributed to a rise in inflation towards the upper boundary of the tolerance band around the target since September.

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as modestly inflationary overall. Higher-than-expected inertia in services inflation is an inflationary risk. Potential excessive growth in total public sector spending would lead to a risk of the state budget having an inflationary effect. Increased wage demands in the private and public sector are an additional upside risk. Global commodity prices are another 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. Some large central banks have already responded to this risk by lowering monetary policy rates and indicating their readiness to continue easing monetary conditions next year. The impact of possible actions by the newly elected US administration represent a source of uncertainty for prices.

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 outlook for the fulfilment of the inflation target.