Minutes of the Bank Board meeting on 7 May 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 third situation report and the new macroeconomic forecast. According to this forecast, inflation would be in the upper half of the tolerance band around the 2% target for the rest of this year. Next year, it would decline very close to the target due to an easing of cost growth. Consistent with the baseline scenario of the forecast was a decline in short-term market interest rates in the second quarter of this year.
The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as modestly inflationary overall. At the start of the meeting, Aleš Michl said that we target low inflation in the long term. The forecast was showing us that core inflation would be above 2% for some time, requiring still tight, hawkish policy. The other board members agreed on the need to be cautious about cutting interest rates and to keep monetary policy moderately restrictive.
In an assessment of developments in the domestic economy, Eva Zamrazilová pointed to its two-track nature: consumer demand – bolstered by fairly rapid wage growth – was strong, while corporate investment demand had yet to recover. Jan Frait also referred to the domestic economy as a dual one. His take was that the still relatively high koruna rates on short-term loans to non-financial corporations were the main argument for cutting interest rates, while the data from other credit segments were not indicating a need for easier monetary and financial conditions. Jan Kubíček pointed to the unfinished disinflation of core prices, adding that the momentum of core inflation had increased during the year so far. Karina Kubelková said that the forecast had been prepared at a time of extreme uncertainty. The monetary policy response also required a cautious approach now but a flexible approach going forward. Jan Procházka stated that the economy was very probably still below its potential, and although household consumption was recovering, it was still lower than before the pandemic in real terms. Jakub Seidler said that in his view, wage growth in the domestic economy might be slower than forecasted, but even weaker wage growth can be inflationary if productivity is stagnant and is distinctly lower than assumed in the model.
Regarding the flash estimate of inflation for April of 1.8%, Jakub Seidler added that the sub-2% level was a one-off and probably due in part to the different timing of the Easter holidays compared to last year – the Easter sales had happened mostly in March last year, whereas they had been in April this year. The April inflation figure should therefore be taken with a pinch of salt. Jan Procházka also said he did not attach great importance to the April inflation estimate and would likewise ignore the expected sharp increase in core inflation to 3% this June.
The Board also discussed growth in services prices. For Jakub Seidler, the still elevated services inflation was reason for a cautious monetary policy response. At the same time, however, an improvement in the momentum of services inflation net of imputed rent was apparent from the March data. This gave rise to moderate optimism regarding fading inflationary pressures in this price category, although the question was whether the details of the April data would confirm this. Eva Zamrazilová said that for her, the growth in services prices still constituted a righting of past price distortions rather than a persistent inflationary hotspot going forward, though it could not be deleted from the list of upside risks. Jan Procházka expressed the opinion that although the growth in services prices posed some risk to the robust maintenance of price stability at the monetary policy horizon, it was partly structural in nature, and moderately restrictive monetary policy should be enough to suppress it.
The board members went on to discuss in more detail the observed brisk growth in house prices and its effect on imputed rent. Eva Zamrazilová expressed the view that the high saving rate in recent years represented deferred demand for property rather than for consumption and that the savings were now being put to work. The impact on inflation was thus materialising through imputed and market rents, which for her was reason for holding rates rather higher than if house prices were going up at a rate of around 2%. Jan Kubíček added that although it is not the role of central bank interest rates to address structural and institutional problems in the housing market, property is involved in one way or another in a large proportion of new loans in the Czech economy, so this market has to be taken into consideration. Karina Kubelková described the brisk growth in house prices as a consequence primarily of the long-term structural characteristics of this sector and she did not currently include housing market developments among the risks requiring a monetary policy response. Jakub Seidler also drew attention to the role of supply factors in the growth in house prices. Jan Frait added that the housing market was an asset market, hence it was only natural for it to see some swings. In his opinion, the CNB’s policies were currently having an essentially neutral effect on the housing market and the high house prices were due to factors outside the CNB’s competence.
The Board also discussed the current geopolitical tensions, in particular the trade wars. According to Eva Zamrazilová, any weakening of global demand would have an anti-inflationary effect, as would a weaker dollar via cheaper commodities. On the other hand, the trade wars may have an inflationary effect through the supply side of the economy. On top of that, China may try to make up for the drop in trade with the United States by increasing the margins (prices) on its export products in other markets, which would also have an inflationary effect. The overall impact of the actions of the US administration on inflation was thus very unclear, so she was not taking this issue too much into account in her decision today. Karina Kubelková regarded the geopolitical tensions as the main uncertainty going forward. The individual risks stemming from abroad were very difficult to separate, but she attached a slightly higher probability to the anti-inflationary impacts at the forecast horizon. Jan Kubíček felt that the market was tending to exaggerate the significance of the tariff wars, so he expected, for example, euro market rates to correct somewhat. Jan Procházka said that the heightened uncertainty in global trade could weaken the koruna and strengthen deglobalisation tendencies, so while in the past, tradables prices had offset growth in non-tradables prices and helped to keep inflation near the target, this may not remain the case in the future. According to Jakub Seidler, lower energy prices – especially oil prices – would reduce the negative impacts of the trade wars on global growth and have an anti-inflationary effect. On the other hand, it was very hard to quantify the upside risks to inflation, such as the possible disruption of supply chains.
Jan Kubíček drew attention to the ongoing Europe-wide tendency to relax the fiscal rules, which in the future could also be reflected in Czech government budget expenditure. Eva Zamrazilová assessed the overall balance of risks to the fulfilment of the inflation target as inflationary, due to the effect of the domestic economy, while the risks from abroad were relatively neutral overall. Jan Frait said it was vital to closely monitor the actions of the new German government, nor could the evolution of the ECB’s monetary policy be ignored.
From the monetary policy decision-making perspective, Jan Procházka expressed the belief that, even taking into account the upside risks to inflation, holding rates at the current level for longer would not be consistent with the state of the Czech economy. A smaller rate cut than in the forecast would take adequate account of the upside risks. Karina Kubelková agreed that a 0.25 percentage point cut would be a sufficiently cautious move reflecting the balance of risks and uncertainties. Jakub Seidler also saw room for a cautious rate cut at the current meeting, but the subsequent monetary policy response should depend on a clarification of the foreign risks. Eva Zamrazilová said she did not see as much room for reducing interest rates as the forecast did, and her vote to cut rates today could be the last one this year if the upside risks to inflation were to materialise. Jan Kubíček agreed that there was still some room to cut rates, though probably less room compared to the forecast, but the question was its timing. In his view, the economy still needed moderately restrictive monetary policy at the moment and, after weighing up all the risks, including the risk of a potential monetary policy error, he was inclined to leave rates unchanged. Jan Frait also summarised that, given the inflationary pressures still present in the domestic economy and the persistence of inflation above the target for several years, moderately restrictive monetary policy remained appropriate.
At its meeting, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 3.5%. At the same time, it lowered the discount rate by the same amount to 2.5% and the Lombard rate to 4.5%. Six members voted in favour of this decision: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Procházka and Jakub Seidler. One member, Jan Kubíček, voted for leaving rates unchanged.
Author of the minutes: Vojtěch Molnár, Monetary Department