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