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 3.75 %. It also lowered the other key interest rates by the same amount. All seven members voted in favour of this decision.

The decision is underpinned by a new macroeconomic forecast, which implies a modest decline in interest rates followed by broadly stable rates from mid-2025 onwards. The Bank Board also discussed two alternative scenarios. The first one assumes faster growth in services and food prices compared to the baseline scenario. The second alternative scenario assumes a further deterioration of external demand accompanied by more persistent domestic inflation pressures, especially in services.

The CNB started lowering interest rates in December 2023, gradually reducing them from 7% to 4%. It paused the rate reduction cycle in December 2024. Newly available indicators from the economy suggest that the short-term inflationary risks are not materialising yet and external demand remains subdued. Therefore, the Bank Board made a further cautious interest rate cut today. However, as the degree of monetary policy restriction eases gradually and some longer-term inflationary risks persist, the Bank Board will approach any further monetary policy easing with great caution. It is therefore possible that monetary policy will remain slightly restrictive for longer than expected in the baseline scenario.

Key interest rates remain significantly positive in real terms and are still dampening lending activity in the private sector and hence the creation of money in the economy and, in turn, long-term inflation. However, this is counteracted by higher financing of the general government deficit, the contribution of which to money supply growth is above the long-term average.

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 monetary policy in order to maintain inflation near the 2% target in the long term. At present, this still requires relatively high key interest rates.

Economic developments

The Czech economy is gradually recovering but is below its potential. According to the CZSO’s flash estimate, GDP rose by 0.5% quarter on quarter and by 1.6% year on year in 2024 Q4.

Growth is being driven mainly by household consumption, which is being supported by renewed real income growth and moderation of monetary policy restriction. On the other hand, external demand remains subdued, mainly due to the decline in European industry. The latter is facing high energy prices, structural problems and uncertainty relating to US trade policy.

The labour market tightness is easing slowly, but unemployment remains low. Average wage growth stood at 7% in 2024 Q3, remaining elevated from a historical perspective. It is also one of the reasons for the inertia in services inflation.

Outlook

According to the Monetary Department’s forecast, inflation will reach 2.4% this year and decrease to 2.1% next year. Today’s flash estimate of inflation for January implies risks of slightly higher inflation this year.

According to the Monetary Department’s forecast, Czech GDP will grow by 2% this year, driven mainly by household consumption. By contrast, net exports will have a negative effect on the economy. According to the forecast, economic growth will accelerate to 2.4% next year.

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 and food inflation is an inflationary risk. Potential additional 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. 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 this year. The impact of some of the actions by the newly elected US administration represents 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.

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