Czech central bank statement following Feb 2 policy meeting

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PRAGUE, Feb 2 (Reuters) -The following is the Czech central bank (CNB) board's statement following its monetary policy meeting on Thursday:


At its meeting today, the Bank Board kept interest rates unchanged. The two-week repo rate remains at 7%, the discount rate at 6% and the Lombard rate at 8%. Five members voted in favour of this decision, and two members voted for increasing rates by 0.50 percentage point.

The CNB’s interest rates are at a level that is dampening domestic demand pressures. They are slowing growth in koruna bank loans to households and firms and hence also in the quantity of money in the economy. The volume of pure new mortgage loans fell by 60% last year (and by 81% year on year in December 2022). Taking into account the inflation outlook one year ahead, real interest rates rose to positive levels for the first time many years. Monetary conditions have also tightened further due to the koruna appreciating against the euro.

The Bank Board will wait for further data and will assess them. It will decide at the next meeting whether rates will remain unchanged or increase. The Bank Board still stands ready to raise monetary policy rates, especially if the risk of demand-pull inflation increases. The Bank Board states that long-term price stability is also contingent on moderate wage bargaining demands and responsible fiscal policy.

The decision adopted is underpinned by a new macroeconomic forecast. The monetary policy horizon in the baseline scenario is the first half of 2024, as in the previous forecast. We have thus returned to the original monetary policy horizon. In addition, the Bank Board discussed a scenario in which the CNB’s key interest rates remain at the current level for longer. In both scenarios, inflation falls close to the target in the first half of next year.

The Czech National Bank will continue to prevent excessive fluctuations of the koruna.

At the same time, the Bank Board confirmed its determination to continue fighting inflation until it is fully under control, i.e. stabilised at the 2% target. This means interest rates will remain relatively high for some time.

Economic developments

The Czech economy is facing both strong cost inflation pressures from the external environment and demand pressures from the domestic economy. The strength of the foreign cost pressures and the problems in supply chains are gradually easing. Moreover, given the mild winter and gradual diversification of gas supplies, prices of gas and electricity on energy markets have fallen to the levels observed before Russia’s invasion of Ukraine. However, it will take time for this decline to pass through to consumer prices.

According to the CZSO’s flash estimate, GDP fell by 0.3% quarter on quarter in Q4. The economy thus entered a mild recession. Household consumption, which is crucial for the future course of demand-pull inflation, is being dampened by high energy and food prices, negative sentiment and higher interest rates. In quarter-on-quarter terms, household consumption has been falling for five consecutive quarters.

On the other hand, unemployment remains low. Industrial production has so far been resilient to the increased costs and supply chain problems. However, leading indicators point to a slowdown in external demand.

The effect of fiscal policy on economic activity is broadly neutral at the moment, but with an upside risk to inflation going forward.


We expect inflation to have risen significantly in January compared to December. The CZSO will publish the exact data on 10 February. The government measure to help with high electricity prices (the energy savings tariff) ended at the close of December. The prices of electricity and gas for households then increased to levels determined by the government cap in January. The rise in inflation in January also reflected the traditional January repricing, which the forecast expects to be stronger than usual.

According to our new forecast, inflation will decline relatively quickly from spring onwards. In the second half of the year, inflation will fall below 10% due to tight monetary conditions and easing cost pressures. The forecast also expects inflation to get close to the inflation target in the first half of next year.

According to the forecast, average inflation will reach 10.8% in 2023 as a whole and then fall to 2.1% in 2024 (for comparison, it was 15.1% in 2022).

As regards GDP, the economy will decline by 0.3% this year according to the forecast. At the start of the year, the recession will be milder than the November forecast expected, owing mainly to favourable energy market developments and more robust external demand. We still expect domestic demand to decrease. Household consumption will be hit by a deep decline in real income, and firms’ total investment will decrease. The economy will gradually return to growth as the cost pressures unwind − next year the economy will grow by 2.2% according to the forecast.

The forecast implies temporary growth in the 3M PRIBOR market interest rate, followed by a gradual decline from 2023 Q2 onwards. At the meeting today, however, a majority of the Bank Board preferred to keep key interest rates unchanged for longer, having regard to the sensitivity scenario. In this simulation, too, inflation falls close to the inflation target in the first half of next year.

As far as the external environment is concerned, our new forecast assumes that foreign cost inflation pressures will continue to ease gradually in the course of this year. A deterioration in economic sentiment and growth in households’ living costs and firms’ expenses, coupled with monetary policy tightening by major central banks, lead to a downturn in global economic activity and a gradual decrease in global inflation pressures.

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook as being significant and going in both directions. More expansionary fiscal policy is an upside risk. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral also remain significant risks in the same direction. By contrast, a stronger-than-forecasted downturn in domestic consumer and investment demand is a downside risk. A faster-than-expected decline in core inflation is also an anti-inflationary risk. The extent of repricing of goods and services in January, which will affect annual inflation throughout 2023, is a risk in both directions. The general uncertainties of the outlook include the future course of the war in Ukraine, the availability and prices of energy, and the future monetary policy stance abroad.

Statutory mandate

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


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