Minutes of the Bank Board meeting on 25 June 2025

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

The meeting opened with a presentation of the fourth situation report based on an assessment of information obtained since the spring forecast was drawn up. Consistent with the forecast was a decline in 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 inflationary overall. In this context, Aleš Michl said that the Board should stay hawkish, keep monetary policy restrictive and not allow high inflation to return. It needed to keep inhibiting growth in the quantity of money in circulation and drawing attention to the inflationary risk of perpetual public finance deficits and to the risk of excessive growth in property prices. The fight against inflation was not over; inflationary risks persisted.

In the Board’s discussion of the current and future monetary policy stance, Jan Kubíček said that monetary conditions were still restrictive, though now only very moderately so, mainly because of the exchange rate component. Against this, Jan Frait regarded the combination of interest rates and the exchange rate as roughly neutral. Different parts of the economy would probably require slightly different rate levels, but he considered the overall stance to be appropriate. In view of exchange rate developments, Jan Frait pointed to the risk of the CNB coming under pressure to cut its key rates further to keep the monetary conditions neutral if the major central banks continued to lower their rates. On this point, Jan Kubíček noted that based on recent comments, the ECB was nearly at the end of its rate-cutting cycle and markets expected only one more reduction this year. As inflation would be close to the upper boundary of the target tolerance band over the next few months, Karina Kubelková felt that it could not be regarded as safely anchored, so moderately restrictive policy was justifiable. If the prevailing upside risks to inflation did not lessen considerably and the risks associated with trade wars did not change, Eva Zamrazilová and Jakub Seidler were of the opinion that there was very limited room for interest rates to come down further over the rest of this year. Jan Frait likewise said it was hard to imagine easing monetary policy further in the absence of services disinflation. On the contrary, he and Jan Procházka felt that, given the subdued state of industry and consumption, anti-inflationary developments could prevail in the event of a global cooling, opening room for further rate cuts.

The board members agreed that elevated core inflation remained one of the main domestic upside risks to inflation, primarily due to persistent growth in prices of services. Eva Zamrazilová, Jan Kubíček and Jakub Seidler pointed out that not only had the disinflation in the core component halted, but also its momentum of more than 3% indicated that inflation was going up again in some segments of the service sector. Eva Zamrazilová noted that segments such as hotels and restaurants, culture and recreation, which were driving the services inflation, were recording high wage growth of around 10% and also rising employment. Jan Frait added that if the rapid rise in services prices reflected a sustained shift of demand towards nontradables, where productivity is lower, it could be a persistent problem. The Board agreed that the growth in prices on the property market was due mainly to structural problems that monetary policy could hardly solve, unlike the government, which has the right tools at its disposal. Eva Zamrazilová added that the property market situation still needed to be monitored. If the rate of growth of property prices failed to slow, it would imply a sustained pass-through to core inflation. In her opinion, this would require tighter rates than if property prices were rising at a year-on-year rate of less than 5%. Jakub Seidler and Jan Procházka noted that even without imputed rent, core inflation had shown its highest momentum since September 2024 in May this year. Eva Zamrazilová and Karina Kubelková felt that food price inflation, which was currently around 5%, was a major uncertainty; moreover, agricultural producer price inflation had picked up to 15% in recent months. Relaxed fiscal policy was repeatedly mentioned as another upside risk to inflation. In this context, Eva Zamrazilová said that if the structural deficit did not decrease, it could be grounds for leaving rates higher.

The Board also discussed domestic real economic activity in some depth. Jan Frait said that the Czech economy continued to surprise with its resilience – after strong GDP growth in the first quarter, estimates remained optimistic for the second quarter as well. Given the subdued growth in household consumption and weak fixed investment, however, he was not expecting sentiment to improve significantly. Eva Zamrazilová said that although household consumption was lagging behind the forecast, she did not regard the 2.5% growth rate as a bad result; in addition, it was likely to be revised up. Jan Kubíček, Jan Procházka and Jakub Seidler also drew attention to the discrepancy between the weaker household consumption in the first quarter and monthly sub-indicators such as retail sales and sales in services. Karina Kubelková said that the rapid economic growth seen in the first quarter may be temporary, caused in part by stockpiling by foreign trading partners fearing the imposition of tariffs on imports of goods to the USA. Jan Frait meanwhile mentioned the continuing decline in fixed investment. In the labour market, Jan Kubíček pointed to the sharp rise in the registered unemployment rate to 4.4% – the highest level in several years. However, it was not clear whether this was a result of more lay-offs or of the service sector’s inability to absorb workers from industry. Wage growth meanwhile remained elevated and vacancies stable, possibly indicating a structural imbalance between supply and demand in the labour market and constraining potential output growth.

Turning to external risks, Jan Procházka noted that although markets were reacting surprisingly calmly to the trade and geopolitical conflicts, these factors would sooner or later cause global growth to slow. Karina Kubelková added that the unclear and uncertain situation would depress market, consumer and corporate sentiment, which in turn would reduce private consumption and investment. The individual risks were meanwhile impossible to separate clearly, and their timing, intensity and impact on inflation could not be reliably estimated due to lags. Eva Zamrazilová said that the evolution of the global economy remained the sole potential anti-inflationary risk. However, she had regarded the scenario that trade wars would lead to disinflationary pressure as unlikely from the outset, and this likelihood was continuing to decrease as the situation unfolded. Jakub Seidler added that the anti-inflationary risk associated with trade wars had weakened since the May meeting, but this trend was fragile and could quickly change, as it had done several times in recent months. By contrast, the geopolitical risks themselves had increased, making energy commodity prices more volatile. Eva Zamrazilová viewed the crude oil price as a new risk – the current fuel price level was helping to keep inflation below the 3% boundary of the tolerance band, but a slower year-on-year decline in fuel prices could lift inflation above the expected level.

At its meeting, the Bank Board kept interest rates unchanged. The two-week repo rate thus remains at 3.50%, the discount rate at 2.50% and the Lombard rate at 4.50%. All seven members voted in favour of this decision.

Author of the minutes: Martin Motl, Monetary Department