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%. All seven board members voted in favour of this decision.

Since October 2022, the CNB has not intervened on the foreign exchange market to counter depreciation of the koruna. The Bank Board today formally ended the intervention regime announced in May 2022 and at the same time resumed the programme of sales of part of the income on international reserves. As part of the managed float regime, the CNB will always as a matter of principle prevent excessive fluctuations of the koruna exchange rate that would jeopardise price stability or financial stability, at any time the Bank Board deems it necessary.

The interest rate decision is underpinned by a new macroeconomic forecast. Its baseline scenario implies a gradual decline in interest rates from 2023 Q3 onwards. In addition, the Bank Board discussed two other scenarios. The first simulates the potential impact of elevated inflation expectations, while the second assumes a faster recovery in domestic demand. The appropriate response to the risks described in both scenarios is to keep rates at the current level for longer than in the baseline scenario.

The CNB’s interest rates are high enough to ensure that inflation returns to the target in all three scenarios considered. The tight monetary policy stance is 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 are distinctly positive for the first time in many years. Monetary conditions, which reflect interest rates and the exchange rate level, are the tightest in twenty years.

Although inflation fell from 18% in September 2022 to 9.7% in June 2023, it is still at unacceptable levels. The Bank Board confirms its determination to continue fighting inflation until it is fully under control, i.e. stabilised close to the 2% target.

At its meetings ahead, the Bank Board will base its decisions mainly on an assessment of newly available data and of the fulfilment of the forecast. The Bank Board expects interest rates to be higher than in the baseline scenario of the forecast in the coming quarters. This will ensure that inflation returns to levels close to the inflation target next year, even if the inflationary risks of the forecast materialise as elevated inflation expectations or a faster return of domestic demand to growth. From this point of view, the current market expectations regarding the pace of the decrease in rates may not materialise.

The Bank Board states that long-term price stability is contingent on responsible fiscal policy and moderate wage growth. The road to lower inflation in the long term thus also leads via a reduction of the state budget deficit.

Economic developments

The strong cost inflation pressures from the external environment and demand pressures from the domestic economy are receding in the Czech economy. According to the CZSO’s flash estimate, GDP rose by 0.1% quarter on quarter in Q2. In the previous quarter, the economy had stagnated. On a year-on-year basis, GDP fell by 0.6% in Q2. Growth continued to be countered mainly by household consumption, which is being dampened by high energy and food prices, negative sentiment and higher interest rates. According to our analyses, the economy is below its potential.

On the other hand, unemployment remains low and the labour market tight. Industrial production is rising year on year, due mainly to a recovery in the automotive industry as supply chain problems recede. However, the value of new industrial orders is falling year on year. External demand is slowing, partly because of the tight monetary policies of major central banks and the gradual fading of the government measures adopted during the energy crisis.

We are seeing a slowdown in the property and mortgage markets, which will gradually contribute to a further easing of core inflation. The double-digit year-on-year decline in the volume of pure new mortgages has continued in recent months. The volume of pure new mortgages fell by 56% year on year in January–June.

Outlook

We expect headline inflation to continue declining gradually in Q3. This trend will temporarily halt in October 2023 as a result of the statistical effect of last year’s energy savings tariff, which lowered the comparison base.

According to the baseline scenario of the forecast, the average inflation rate will be 11% in 2023 as a whole and fall to 2.1% in 2024 (for comparison, it was 15.1% in 2022). However, core inflation will be elevated at a level exceeding 3% next year.

As regards GDP, the economy will stagnate this year according to the forecast (growth of 0.1% year on year). Domestic demand will rebound in the second half of this year on the back of renewed real growth in the income of households and the investment activity of firms. GDP will return to year-on-year growth of around 2% next year.

Risks and uncertainties

The Bank Board assessed the risks of the forecast and the uncertainties of the outlook as being significant and tilted to the upside. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral, which would lead to renewed demand-pull pressures and persistent inflation, are the main upside risks to inflation. A longer effect of expansionary fiscal policy is also an inflationary risk. 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.