Statement of the Bank Board for the press conference following the monetary policy meeting
At its meeting today, the Bank Board of the Czech National Bank 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 0.75 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 states 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 the summer (August) macroeconomic forecast and by an assessment of information obtained since it was prepared.
The Czech National Bank will continue to prevent excessive fluctuations of the koruna.
At the same time, the Bank Board confirmed its commitment to continue fighting inflation until it is fully under control, i.e. stabilised at the 2% target. This means interest rates will remain relatively high for some time.
The Czech economy is facing both strong cost inflation pressures from the external environment and demand pressures from the domestic economy.
The economy grew by 3.7% year on year in 2022 Q2. This was broadly in line with the forecast (3.6%). Household consumption, which is crucial for the future course of demand-pull inflation, is now being dampened by high energy and food prices, negative sentiment and higher interest rates. Firms are facing rising costs of energy and commodities, which will slow investment growth.
On the other hand, unemployment remains low. Industrial production has so far been resilient to the increased costs and supply chain problems. However, foreign trade 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 has so far been broadly neutral, but with an upside risk to inflation going forward.
According to our current forecast, inflation will rise in the coming few months. The rise will be due mainly to gas and electricity prices. Inflation may still reach around 20% in the autumn. It will average 16.5% for this year as a whole (our spring forecast expected 13.1%). According to the forecast, inflation should decline to around 2% in a year and a half.
As far as the external environment is concerned, our current projection assumes that the inflation pressures will remain strong this year. Major central banks are tightening monetary policy in reaction to the rising inflation, and are doing so more forcefully than we expected. A deterioration in economic sentiment and growth in households’ living costs and firms’ expenses, coupled with the monetary policy tightening by major central banks, will gradually lead to a downturn in global economic activity and a decrease in inflation pressures from abroad 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. The upside risks to inflation include faster-than-forecasted wage growth (we expect wage growth of 4.5% this year), more expansionary fiscal policy and a higher outlook for foreign producer prices. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral remain significant risks in the same direction. By contrast, the growing likelihood of recession abroad and a stronger-than-forecasted downturn in domestic consumer and investment demand are downside risks. The introduction of measures to limit growth in energy prices at the domestic or European level and a faster-than-expected decline in core inflation are additional anti-inflationary risks. The general uncertainties of the outlook include the future course of the war in Ukraine, the availability and prices of energy, and the future monetary policy stance abroad.
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.