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 0.50 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. From this point of view, the market’s expectation that we will not increase rates in the first half of next year may not materialise. The Bank Board stands ready to raise rates, especially if the risk of demand-pull inflation increases.

The decision is underpinned by the autumn (November) 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 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 and comparison with the forecast

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

However, the demand pressures are now easing. GDP decreased by 0.2% in quarter-on-quarter terms in 2022 Q3. 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. Consumption fell by 3.1% quarter on quarter in real terms, its largest-ever decline if we abstract from the first lockdown in the Czech Republic. The average wage increased by 6.1% in Q3 but fell by 9.8% in real terms.

We are also seeing a major slowdown in the property and mortgage markets. The year-on-year change in pure new mortgages was -82% in October. This will gradually help reduce core inflation.

Firms are facing rising costs of energy and commodities, which is slowing investment growth. The year-on-year change in pure new koruna loans to corporations was -42.6% in October.

On the other hand, unemployment remains low. Industry is facing increased costs, while the supply chain problems are gradually easing. However, leading indicators point to a slowdown in external demand.

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

Inflation is below our current forecast at the close of this year. This is due to the methodology for including the electricity savings tariff in October–December. This effect will fall out in January and inflation will approach 20%, partly due to the expected increase in electricity and gas prices. According to our forecast, inflation will peak at this level. Monetary policy affects inflation with a considerable lag. Inflation will start to come down in the spring. According to the updated forecast, inflation will decline to close to the 2% target in a year and a half.

As far as the external environment is concerned, our current projection assumes that foreign cost inflation pressures will remain strong until the middle of next year. Major central banks are tightening monetary policy in reaction to the high inflation. 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 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, oil prices and indicators of supply chain overloading.

The Bank Board assessed the risks and uncertainties of the outlook 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) and more expansionary fiscal policy. 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. A faster-than-expected decline in core inflation is also an anti-inflationary risk. The extent of repricing of goods and services in January, which will affect annual inflation throughout 2023, is a risk in both directions. 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.