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

At its meeting today, the Bank Board kept interest rates unchanged. The two-week repo rate remains at 7%, the discount rate at 6% and the Lombard rate at 8%. Five members voted in favour of this decision, and two members voted for increasing rates by one percentage point.

The CNB’s interest rates are at a level that is dampening domestic demand pressures. They are slowing growth in loans to households and firms and hence also in the quantity of money in the economy. The Bank Board agreed that long-term price stability is also contingent on moderate wage bargaining demands and responsible fiscal policy. The Bank Board will wait for further data and will assess them. It will decide at the next meeting whether rates will remain unchanged or increase.

The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. In the baseline scenario of the forecast, the monetary policy horizon is shifted to 18–24 months ahead due to extraordinary cost pressures amid exceptionally high uncertainty. The Bank Board also discussed other scenarios.

The Czech National Bank will continue to prevent excessive fluctuations of the koruna.

The Czech economy is facing both strong cost inflation pressures from the external environment and demand pressures from the domestic economy.

Household consumption, which is crucial for the future course of demand-pull inflation, is being dampened by high energy and food prices, negative sentiment and higher interest rates.

On the other hand, unemployment remains low. Industrial production has so far been resilient to the increased costs and supply chain problems. However, external demand is now having a negative effect on GDP. Leading indicators point to a further slowdown in external demand.

The effect of fiscal policy on economic activity is now broadly neutral.

According to our new forecast, inflation will rise further in the coming few months. The rise will be due mainly to gas and electricity prices. We expect inflation to reach around 20% in the autumn and to average 16.5% for the year as a whole (in our spring forecast we expected 13.1%). According to the forecast, inflation should decline to around 2% in a year and a half.

GDP grew by 3.5% last year. According to the forecast, economic growth will drop to 2.3% this year (the spring forecast for GDP growth this year was 0.8%). A further slowdown to 1.1% is expected for next year (the spring forecast was 3.6%). We expect domestic demand to slow. Household consumption will be hit by a decline in real income, as wage growth will not cover growth in living costs. Firms are facing rising costs of energy and other commodities and materials, and will rein in investment for that reason as well.

According to the baseline scenario of the forecast, three-month market interest rates (3M PRIBOR) will be broadly stable initially and decline gradually next year.

The forecast expects the koruna exchange rate to depreciate modestly in the next few quarters.

As far as the external environment is concerned, our new forecast assumes that the inflation pressures will be stronger this year. A deterioration in economic sentiment and growth in households’ living costs and firms’ expenses, coupled with monetary policy tightening by major central banks, will gradually lead to a downturn in global economic activity and a decrease in inflation pressures in the years ahead.

The Bank Board assessed the risks and uncertainties of the baseline scenario of the forecast as being significant and going in both directions. A further rise in commodity prices, a threat of inflation expectations becoming unanchored, a related risk of a wage-inflation spiral and easier fiscal policy are upside risks to inflation. By contrast, the growing likelihood of recession abroad and a stronger-than-forecasted downturn in domestic consumer and investment demand are downside risks. The general uncertainties of the outlook include the future course of the war in Ukraine, the availability and prices of energy, the future monetary policy stance abroad and the duration of the disruptions to global supply chains.

The Bank Board assures the public that the CNB’s actions will be sufficient to restore 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.