Statement of the Bank Board for the press conference following the monetary policy meeting


At its meeting today, the Bank Board lowered the two-week repo rate by 0.5 percentage point to 5.75%. At the same time, it lowered the discount rate by the same amount to 4.75% and the Lombard rate to 6.75%. Five members voted in favour of this decision, and two members voted for lowering rates by 0.75 percentage point.

The decision is underpinned by the winter (February) macroeconomic forecast and by an assessment of information obtained since it was prepared.

Inflation in the Czech Republic declined to the CNB’s 2% inflation target at the start of the year. Price stability was thus renewed in our country. However, the Bank Board still sees modestly inflationary risks in the outlook. Their materialisation would mean that inflation would diverge from the target towards the upper boundary of the tolerance band in the quarters ahead. Therefore, the Bank Board considers it necessary to persist with tight monetary policy and continue to approach further rate cuts with caution. Newly available indicators suggest higher rates compared with the baseline scenario of the current forecast over the entire forecast horizon.

At its meetings ahead, the Bank Board will base its decisions on an assessment of newly available data and their implications for the inflation outlook. The pace of further reduction in rates will depend mainly on an evaluation of the persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy, an analysis of the labour market situation, and the evolution of domestic and external demand. The Bank Board will also assess the transmission of interest rate cuts to lending activity and subsequently real economic activity. At the same time, the Bank Board states that the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive if inflation – especially its core component – does not develop in line with the forecast.

Although the CNB started lowering rates gradually in December 2023, the fight against inflation is not over. Interest rates remain significantly positive in real terms and are dampening inflation. The Bank Board confirms its determination to continue its tight monetary policy in order to stabilise inflation near the 2% target in the long term.

Economic developments

According to our analyses, the economy is below its potential. GDP rose by 0.2% quarter on quarter in 2023 Q4, while the forecast had expected stagnation. Household consumption rose slightly, but was 8% below the level observed before the pandemic.

The available indicators from the real economy are indicating continued quarterly growth in real GDP in 2024 Q1. With inflation falling, real household income growth is recovering. This is reflected in improved, albeit still rather negative, household sentiment. The recovery in domestic demand is confirmed by the figures for retail sales, which saw positive year-on-year growth in December for the first time since May 2022 and accelerated further in January.

The labour market tightness is easing slowly, but unemployment remains low. Wage growth slowed to 6.3% in line with the forecast in 2023 Q4. It remains slightly elevated from a historical perspective, but the risk of a wage-price spiral does not seem to be materialising.

External demand continues to slow, due in part to the tightened monetary policies of major central banks and the fading of government measures taken during the energy crisis. Real activity is declining, particularly in manufacturing in Germany.

Annual inflation fell sharply to 2.3% in January and reached the CNB’s 2% target in February. The decline was therefore deeper than forecasted. However, core inflation remains elevated, reaching 2.8% in February. Growth in services prices in particular remains above the level consistent with achieving the inflation target over the long term.

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook as being modestly inflationary. A slower decline in the elevated inflation expectations is a risk in this direction. Given the tight labour market, this could be reflected in stronger wage demands. Higher-than-expected inertia in services prices and a halt in tradables disinflation, which has so far been due mainly to fading supply-side problems, are additional upside risks. Movements in the koruna exchange rate, which could cause prices of imported goods to go up, are an upside risk to tradables prices. An inflationary risk in the longer term is a potential acceleration of money creation in the economy stemming from a significant recovery in lending activity. By contrast, a stronger-than-expected downturn in global economic activity and weaker German economic output are a downside risk to inflation. The future monetary policy stance abroad remains an uncertainty of the outlook.

Statutory mandate

The Bank Board assures the public that the CNB’s actions will be sufficient to maintain 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.