Minutes of the Bank Board meeting on 26 March 2025

Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Kubíček, Jan Procházka, Jakub Seidler

The meeting opened with a presentation of the second situation report based on the updated inflation outlook, the associated risks and an assessment of new data obtained since the winter forecast was drawn up. Consistent with the forecast was a continued decline in short-term market interest rates, 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 inflationary overall. Aleš Michl opened by saying there was a need to keep inhibiting the quantity of money in circulation, to stay hawkish, to draw attention to the inflationary risk of perpetual public finance deficits and to encourage pay restraint, as inflationary risks persisted.

Most of the risks identified at the February meeting remained relevant. This was especially true for the domestic economy. Karina Kubelková said that although the winter forecast was materialising quite well, the overall scale of the risks and uncertainties had increased since it was drawn up. The downside risks to inflation had diminished, but they had not gone away. Jan Kubíček also assessed the signals from the domestic economy as mixed and largely unchanged, but there were strong new impulses coming in from abroad. Eva Zamrazilová pointed to the two-track nature of the domestic economy. Consumer demand was recovering on the back of stronger growth in household consumption at the end of last year, whereas investment had yet to turn around. Jakub Seidler agreed with this. According to Jan Kubíček, the weak investment activity reflected low growth in corporate loans, in addition to muted external demand and an uncertain outlook in some industries. Jan Frait also felt that a major dichotomy was apparent. At first glance, the domestic economy was very stable. Interest rates were set at an appropriate level. They were not a major source of constraints on the funding of various activities, while also keeping lending at an acceptable level. By contrast, the global situation was very unclear, requiring a wait-and-see approach. Other members (Jan Procházka, Jan Kubíček, Jakub Seidler) agreed.

According to Eva Zamrazilová, upside risks were linked primarily with persisting elevated price growth in services and renewed growth in food prices in conjunction with faster-than-expected wage growth. Consumers were now relatively optimistic, and sentiment about large purchases was improving. It was clear that household demand, bolstered by brisk wage growth, was steadily shifting more and more towards services. Jan Procházka saw the continued price persistence in this segment as a repercussion of the inflation episode of 2023 and of structural changes in the economy and demand. Jakub Seidler noted that the structure and momentum of inflation indicated that the inflation pressures in services might persist further. According to Jan Kubíček, the situation was uncomfortable because even minor fluctuations could move core and headline inflation to almost 3%.

Other risks were also discussed. There was persisting uncertainty regarding the anchoring of inflation expectations. After two years of inflation in double figures, consumers and firms might be far more sensitive to elevated growth in prices of food, for example (Jakub Seidler, Karina Kubelková). House prices were also mentioned as an upside risk. Eva Zamrazilová and Jan Kubíček considered the current growth in house prices to be inconsistent with price stability. Jan Frait regarded the still tight labour market as a key risk. Wage growth was a modest upside risk for Jakub Seidler, Jan Kubíček and Eva Zamrazilová as well, because it was creating potential for the absorption of higher inflation. However, the growth in wages was apparently being driven by high-income households, so it would not necessarily be fully reflected in consumption. According to Jakub Seidler, this was also indicated by significantly weaker growth in the median wage.

There had recently been substantial growth in risks associated with tariff increases around the world, which had increased the overall inflationary balance of risks. Jakub Seidler said that the escalation of trade wars and new information concerning faster rearmament constituted major structural breaks, indicating that the present global uncertainty was mounting. Jan Procházka emphasised that the increasing barriers to international trade would have an upward effect on inflation in the short to medium run and would very probably lead to a downturn in economic growth in the longer run. In other words, trade wars have no winners, only losers. Some of the board members (Jan Frait, Eva Zamrazilová) felt that the ultimate effect of trade wars on domestic inflation might not be clear-cut.

Part of the discussion was also devoted to the situation in Germany, which had been assessed in the past as anti-inflationary. The current debates on investing in infrastructure, lifting the debt brake and raising defence expenditure were softening the originally anti-inflationary message and, in the opinion of some, even turning it inflationary. Jan Frait, Jan Kubíček and Karina Kubelková felt that the impacts would only become visible in the longer term and the plans might not all materialise. Their intensity and effect were difficult to evaluate at the moment. According to Eva Zamrazilová, a future relaxation of German fiscal policy should not be taken lightly, not only due to inflation in Germany itself, but also because it could set a precedent for other countries, including the Czech Republic.

Aleš Michl said it was sensible to leave interest rates unchanged at the moment, as the outlook for core inflation was still fairly high. According to Jan Kubíček, the stop-and-go approach that had effectively been started at the end of last year was appropriate to the current situation, as it was allowing interest rates to make a soft landing to their neutral level, which he saw at around 3.5%. For Karina Kubelková, it was important that leaving rates unchanged, or even potentially lowering them by 0.25 percentage point, did not represent a risk to financial stability. The relative proximity to their estimated neutral level called for caution, while Karina Kubelková did not consider the interest rate reduction process to be over. Jan Procházka concurred, adding that slightly restrictive monetary policy was appropriate. Eva Zamrazilová spoke along the same lines. She felt that the balance of risks to the fulfilment of the inflation target was inflationary and that the disinflation process was not entirely over. It was therefore appropriate to communicate in a unified way that the now only slightly restrictive monetary conditions would not be eased prematurely.

After discussing the situation report, the Bank Board left interest rates unchanged. All seven members voted in favour of this decision: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Kubíček, Jan Procházka and Jakub Seidler.

Author of the minutes: Jan Syrovátka, Monetary Department