Minutes of the Bank Board meeting on 6 February 2025
Present at the meeting: Aleš Michl, Jan Frait, Eva Zamrazilová, Karina Kubelková, Jan Kubíček, Jan Procházka, Jakub Seidler. Minister of Finance Zbyněk Stanjura was present at the open part of the meeting.
The meeting opened with a presentation of the first situation report and the new macroeconomic forecast. According to this forecast, inflation would be slightly above the 2% target this year and very close to it over the monetary policy horizon. Consistent with the baseline scenario of the forecast was a continued decline in short-term market interest rates initially, followed by broadly stable rates from mid-2025 onwards.
The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as modestly inflationary overall. In the Board’s discussion about the present and future monetary policy stance, Aleš Michl said that the government deficits and growth in the quantity of money in circulation indicated that it was desirable to be hawkish in the long term, to keep monetary policy restrictive and to be very cautious about easing monetary policy any further. Eva Zamrazilová and Jan Frait were also in favour of being cautious about cutting interest rates. Jan Frait added that interest rates were now ceasing to have a restrictive effect in certain areas. This was most visible in the property market. In his opinion, it was therefore crucial to keep rates above the neutral level assumed by the markets in the long term. This way, it would also be possible to deal better with any depreciation pressure on the koruna stemming from the US dollar strengthening on the back of an outflow of capital to the United States. In this context, Jan Kubíček pointed out that long rates were at similar levels to a year ago and had hardly eased at all. However, the yield curve should normally be slightly rising, so Jan Kubíček felt that the relative stability of longer rates was creating room for short-term interest rates to come down further.
The labour market remained tight despite a modest rise in unemployment. According to Jan Frait, from the international perspective we appeared to be seeing low inflation usually in countries where the unemployment rate had gone up substantially. Central banks were meanwhile cutting monetary policy rates more forcefully in countries where labour market conditions were getting less tight. In his opinion, until a significant easing occurred in the domestic labour market, the wage pressures could be expected to be stronger and a very cautious approach would have to be taken to lowering rates further. Eva Zamrazilová, Jan Kubíček and Jakub Seidler also mentioned the better-than-expected performance of the economy in the fourth quarter of last year. This had been driven mainly by household consumption, as indicated by strong growth in retail sales in December. According to Jakub Seidler, this was an additional inflationary factor that had yet to be captured in the forecast. With regard to the improving consumer sentiment, Jan Procházka said that even so, the saving rate would not necessarily go down, as according to the latest data, high-income households were no longer significantly limiting their spending, and at the same time, the proportion of households with income above the median that are still forced to save had finally begun to decrease slowly.
In a debate about prices, the board members discussed the main domestic inflationary risk: higher-than-expected inertia in services and food inflation. The flash inflation estimate for January – published by the Czech Statistical Office just before the monetary policy meeting – was therefore also discussed in detail. The board members agreed that although the expected year-on-year growth in services prices in January of 4.7% was still high, it was lower than in December. The risk of persisting high services inflation had thus receded slightly. Jakub Seidler added that the 1% month-on-month growth in services prices was in line with the January average for 2010–2020 and thus consistent with the relative norm before the inflation surge. By contrast, as regards the structure of the January inflation, the upside risk stemming from faster growth in food prices had increased further. Jakub Seidler noted that food prices would be inflationary in their contribution this year not only because of growth in commodity prices on global markets, but also due to last year’s low base. Together with Karina Kubelková, he drew attention to the potential pass-through of food prices to other price categories and to inflation expectations, given that food plays a major role in households’ inflation perceptions.
According to Eva Zamrazilová, the character of the food inflation was being accompanied by growth in real sales, suggesting that the price growth was partially of a demand nature. By contrast, the elevated services inflation was not being accompanied by real spending, suggesting that it was of a supply nature. This was confirmed by Jan Procházka, who said that the domestic economy was undergoing two sorts of structural changes. On the one hand, demand was shifting from goods towards services. The latter, however, were running up against capacity constraints, and this in turn was pushing up wages. On the other hand, the structure and nature of demand for services were themselves changing, with households consuming less services, but services being all the more expensive. Conversely, Eva Zamrazilová noted that in January, month-on-month goods inflation had been higher than month-on-month services inflation for the first time in a long while. She considered this a major turning point. In this regard, she and Jakub Seidler felt that the price level of services had probably been catching up with that of goods in 2024. Consequently, services may only have been seeing a natural equalisation of their relative prices, which would sooner or later fade out. Jan Kubíček pointed to the sizeable difference in December between core inflation measured by the CPI methodology, which had been 2.3% in year-on-year terms, and core inflation measured by the HICP methodology, in which, among other things, services have a larger weight. Core HICP inflation would have stood at 3.8% and would have been the eighth highest in the EU. He considered this to be quite far from the fulfilment of the price stability objective.
The Board agreed that the deterioration in global economic activity and the weaker performance of the German economy would foster lower inflation. According to Karina Kubelková and Jakub Seidler, this risk had increased further since the December meeting and could be reflected in weaker growth of the domestic economy, which was still below its potential. In addition, Karina Kubelková felt that ECB monetary policy would also put downward pressure on domestic rates if the ECB were to lower its rates faster in response to a sharper demand-driven cyclical downswing in the euro area, especially Germany. According to Jan Kubíček, by contrast, the weaker growth of the German economy was not yet providing any substantial impulse to lower domestic interest rates below their projected trajectory. As regards the uncertainties of the impacts of the potential introduction of tariffs between the United States and Europe, Jan Frait and Jakub Seidler saw a downside risk to inflation in the European context – not only because of weaker economic activity, but also due to efforts to place tariff-hit goods from the relevant territories on the European market. By contrast, Jan Frait identified the visible pressure to relax the fiscal framework in the EU as an upside risk to inflation. This was adding to the already high uncertainty regarding the nature and sustainability of fiscal policies in developed countries. In his view, signs of financial imbalances and unusually high market valuations could also be seen on private asset markets.
With regard to the risks of the forecast, Karina Kubelková and Jakub Seidler referred to the alternative scenarios that had been prepared. These scenarios did not contradict a rate cut of 25 basis points at today’s meeting. Monetary conditions would remain moderately restrictive even afterwards. Moreover, a monetary policy error in the shape of a somewhat tighter monetary policy stance would lead to only a modest undershooting of the inflation target and a minimal slowdown in GDP growth at the forecast horizon. Karina Kubelková noted that a moderate rate cut posed a risk neither to the country’s financial stability nor to the koruna’s exchange rate. Jan Procházka regarded getting to a rate level at which it would be possible to react flexibly to the materialisation of known or new upside or downside risks as the safest strategy. This level was neither 4% nor 3.75%. According to Jan Procházka, we were thus moving from a fine-tuning to a micro-tuning phase.
At its meeting, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 3.75%. At the same time, it lowered the discount rate by the same amount to 2.75% and the Lombard rate to 4.75%. All seven members voted in favour of this decision.
Author of the minutes: Martin Motl, Monetary Department