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%. Six members voted in favour of this decision, and one member voted for increasing rates by 0.25 percentage point.
The Czech National Bank will continue to prevent excessive fluctuations of the koruna.
The decision is underpinned by the winter (February) macroeconomic forecast and by an assessment of information obtained since it was prepared.
The CNB’s interest rates are the highest since 1999 and at a level that is dampening domestic demand pressures. They are slowing growth in koruna bank loans to households and firms and hence also in the quantity of money in the economy. Taking into account the inflation outlook one year ahead, real interest rates have risen to distinctly positive levels for the first time in many years. Monetary conditions have also tightened further in recent months due to the koruna appreciating against the euro.
Uncertainty regarding the economic outlook and the future actions of major central banks has risen since the February meeting, partly due to the financial market situation. Despite these uncertainties, the Bank Board will again decide at its next meeting whether rates will remain unchanged or increase. The Bank Board still stands ready to raise rates, especially if the risk of a wage-price spiral increases. From this point of view, market expectations that rates have peaked may not materialise. We consider the market expectations regarding the timing of the first decrease in CNB rates to be premature.
The Bank Board meanwhile states that long-term price stability is contingent on moderate wage growth and responsible fiscal policy. The road to lower inflation thus also leads via a reduction of the state budget deficit.
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. The strength of the foreign cost pressures and the problems in supply chains are gradually easing. Moreover, given the mild winter and gradual diversification of supplies, prices of gas and electricity on energy markets have fallen to the levels observed before Russia’s invasion of Ukraine. However, it will take time for this decline to pass through to consumer prices.
Inflation was 17.5% year on year in January, in line with the forecast. In February, it decreased to 16.7% (the CNB forecast had been 16.5%). Inflation will fall further in the coming months and reach single digits in the second half of the year. According to the winter forecast, inflation will fall close to the 2% target next year. Core inflation has been decreasing since autumn 2022.
The demand pressures from the domestic economy continue to weaken. GDP fell by 0.4% quarter on quarter in 2022 Q4. The economy thus entered a mild recession. 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. In quarter-on-quarter terms, real household consumption fell for the fifth consecutive quarter. The decline in 2022 Q4 was 2.8%, the deepest decline ever, with the exception of the Covid pandemic. The downturn in GDP, and household consumption in particular, was deeper than expected in our forecast.
We are also seeing a major slowdown in the property and mortgage markets. The double-digit year-on-year decline in the volume of pure new mortgages continued at the start of the year (80% in January). This will gradually help reduce core inflation further.
Firms are facing increased costs of energy and commodities, which is slowing investment growth. While the supply chain problems are gradually easing, they continue to constrain production in some segments of the economy. Tighter financial conditions will also reduce external demand.
On the other hand, unemployment in the Czech Republic remains low. In January, there were relatively significant increases in nominal wages in industry (11.9% year on year) and construction (14.9%). At its May meeting, the Bank Board will thoroughly assess wage developments on the basis of new data, analyses thereof, and surveys.
The effect of fiscal policy on economic activity will be inflationary unless the government deficit is reduced.
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 8.5% in the economy as a whole this year) and more expansionary fiscal policy. The threat of inflation expectations becoming unanchored remains a significant risk in the same direction. By contrast, a stronger-than-forecasted downturn in domestic consumer and investment demand is a downside risk. The persistence of inflation and hence its pace of decrease towards the inflation target is a risk in both directions. Volatility in global financial markets is an uncertainty in both directions for the outlook for the monetary policy stance of foreign central banks and for the degree of tightening of financial conditions. The general uncertainties of the outlook include the future course of the war in Ukraine, and the availability and prices of energy.
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.