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 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 bank 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 is underpinned by a new macroeconomic forecast. The monetary policy horizon in the baseline scenario of the forecast is spring 2024, as in the previous forecast. The Bank Board also discussed other scenarios.

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

At the same time, the Bank Board confirmed its determination 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.

Economic developments

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 now 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, leading indicators point to a slowdown in external demand. Credit activity in the Czech Republic is weakening due to a fall in demand for loans and a tightening of credit conditions by banks.

The effect of fiscal policy on economic activity is now broadly neutral, but with an upside risk to inflation going forward.

Outlook

According to our new forecast, annual inflation will rise further in the coming few months. The rise will be due mainly to gas and electricity prices. We assume that inflation will reach around 20% by the end of this year. It is expected to average 15.8% for the year as a whole (our summer forecast expected whole-year inflation of 16.5%). 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 slow to 2.2% this year (the summer forecast for GDP growth this year was 2.3%). The forecast expects the economy to decline by 0.7% next year (the summer forecast was for GDP growth of 1.1%). We expect domestic demand to decrease. Household consumption will be hit by a decline in real income. Firms are facing rising costs of energy and other commodities and materials, and will rein in investment for that reason as well.

According to our macroeconomic model, it would now be advisable to push for a further increase in the market interest rate (3M PRIBOR) and then support a gradual decrease in that rate from 2023 Q2 onwards. At the meeting today, however, a majority of the Bank Board members preferred to keep policy rates unchanged. They also took into account the fact that long-term interest rates in the Czech Republic had gone up since the last monetary policy meeting due to the global tightening of monetary policy. The national bank now needs to be a firm anchor stabilising conditions in the economy.

As regards the external environment, our new forecast assumes that foreign cost inflation pressures (as captured by the producer price index in the euro area) will remain sizeable this year and in the first half of next 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 lead to a downturn in global economic activity and a gradual decrease in global inflation pressures next year. A moderation of cost pressures can already be observed in non-energy commodity prices and indicators of supply chain overloading (this moderation will pass through to the foreign PPI with a lag).

Risks and uncertainties

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 (our forecast expects wage growth of 6.3% 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 in the Czech Republic and abroad and hence a stronger-than-forecasted slowdown in domestic consumer and investment demand are downside risks. The introduction of additional 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.

Statutory mandate

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.