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 * Home
 * Monetary policy
 * Bank Board decisions

Board decision
7. 11. 2024


STATEMENT OF THE BANK BOARD FOR THE PRESS CONFERENCE FOLLOWING THE MONETARY
POLICY MEETING


DECISION

At its meeting today, the Bank Board lowered the two-week repo rate by 0.25
percentage point to 4%. It also lowered the other key interest rates by the same
amount. Five members voted in favour of this decision, one member voted for
leaving rates unchanged and one member voted for lowering them by 0.50
percentage point.

The decision is underpinned by a new macroeconomic forecast, which implies a
modest decline in interest rates. The Bank Board also discussed two alternative
scenarios. The first one assumes a further downturn in euro area economic
activity, reflected in lower external demand and a faster decline in domestic
inflation towards the target. The second scenario assumes higher retailers’
margins than in the baseline scenario. This will lead to greater persistence of
inflation, especially in the services sector. 

The CNB started lowering interest rates cautiously in December 2023. However,
the fight against inflation is not over. The key repo rate has gradually fallen
from 7% to 4%. This has moderated monetary policy restriction. Monetary policy
nonetheless remains tight. Real interest rates are positive and are dampening
lending activity, and hence the creation of money in the economy, and, in turn,
long-term inflation.

However, the Bank Board expects inflation to rise temporarily in the short term,
i.e. over the next few months, owing to renewed growth in food prices. In
addition, core inflation remains elevated, especially in services. Therefore,
the Bank Board will approach future monetary policy easing with great caution
and may pause the interest rate reduction process.

At its meetings ahead, the Bank Board will base its decisions on an assessment
of newly available data and their implications for the inflation outlook. Its
considerations about the interest rate settings will depend mainly on an
evaluation of the persistence of the low-inflation environment, exchange rate
developments, the effect of fiscal policy on the economy, an analysis of the
tightness in the labour market, and the evolution of domestic and external
demand. The Bank Board will also be ready to react flexibly to the actions of
key foreign central banks and geopolitical events, as well as the potential
materialisation of the above-mentioned scenarios. The Bank Board will also
assess the transmission of interest rate cuts to lending activity, asset prices
and, subsequently, real economic activity.

The Bank Board states that the interest rate reduction process can be paused or
terminated in the months ahead at levels that are still restrictive as rates
approach their neutral levels.

The Bank Board confirms its determination to continue its tight monetary policy
in order to maintain inflation near the 2% target in the long term.


ECONOMIC DEVELOPMENTS

The Czech economy is recovering only slowly and is below its potential.
According to the CZSO’s flash estimate, GDP rose by 0.3% quarter on quarter and
accelerated to 1.3% year on year in 2024 Q3. Domestic demand is being supported
by real household income growth and moderation of monetary policy restriction.
However, its recovery remains moderate and is being dampened by elevated saving.
External demand also remains subdued.

The labour market tightness is easing slowly, but unemployment remains low.
Average wage growth stood at 6.5% in 2024 Q2 and slowed compared to 2024 Q1.
Wage growth remains elevated from a historical perspective.


OUTLOOK

According to the forecast, inflation will be 2.5% this year and will also be
close to the inflation target next year, despite being elevated at the start of
the year. This confirms that the cautious approach to lowering rates taken so
far is right.

According to the forecast, Czech GDP will grow by 1% this year and economic
growth will reach 2.4% next year.


RISKS AND UNCERTAINTIES

The Bank Board assessed the risks and uncertainties of the outlook for the
fulfilment of the inflation target as modestly inflationary overall.
Higher-than-expected inertia in services inflation is an inflationary risk.
Potential excessive growth in total public sector spending would lead to a risk
of the state budget having an inflationary effect. Increased wage demands in the
private and public sector are an additional upside risk. An inflationary risk in
the longer term is a potential acceleration of money creation in the economy
stemming from a significant recovery in lending activity, especially on the
property market. By contrast, a downturn in global economic activity and weaker
German – and hence Czech – economic output are a significant downside risk to
inflation. This is also reflected in the outlook for further rate cuts by major
central banks.


STATUTORY MANDATE

The Bank Board assures the public that the CNB’s actions will be sufficient to
maintain 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 outlook for the fulfilment of the inflation target.

 * Monetary policy objective
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 * Forecast
 * Monetary Policy Reports
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RELATED LINKS

 * How does the Bank Board make decisions
 * Voting of the Bank Board (xlsx, 159 kB)

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