"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%. Six members voted in
favour of this decision, and one member voted for increasing
rates by 0.25 percentage point.
The Czech National Bank will continue to prevent excessive
fluctuations of the koruna.
The decision is underpinned by the winter (February)
macroeconomic forecast and by an assessment of information
obtained since it was prepared.
The CNB's interest rates are the highest since 1999 and 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. Taking into
account the inflation outlook one year ahead, real interest
rates have risen to distinctly positive levels for the first
time in many years. Monetary conditions have also tightened
further in recent months due to the koruna appreciating against
the euro.
Uncertainty regarding the economic outlook and the future
actions of major central banks has risen since the February
meeting, partly due to the financial market situation. Despite
these uncertainties, the Bank Board will again decide at its
next meeting whether rates will remain unchanged or increase.
The Bank Board still stands ready to raise rates, especially if
the risk of a wage-price spiral increases. From this point of
view, market expectations that rates have peaked may not
materialise. We consider the market expectations regarding the
timing of the first decrease in CNB rates to be premature.
The Bank Board meanwhile states that long-term price
stability is contingent on moderate wage growth and responsible
fiscal policy. The road to lower inflation thus also leads via a
reduction of the state budget deficit.
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 and comparison with the forecast
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 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.
Inflation was 17.5% year on year in January, in line with
the forecast. In February, it decreased to 16.7% (the CNB
forecast had been 16.5%). Inflation will fall further in the
coming months and reach single digits in the second half of the
year. According to the winter forecast, inflation will fall
close to the 2% target next year. Core inflation has been
decreasing since autumn 2022.
The demand pressures from the domestic economy continue to
weaken. GDP fell by 0.4% quarter on quarter in 2022 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, real household consumption fell for the fifth consecutive
quarter. The decline in 2022 Q4 was 2.8%, the deepest decline
ever, with the exception of the Covid pandemic. The downturn in
GDP, and household consumption in particular, was deeper than
expected in our forecast.
We are also seeing a major slowdown in the property and
mortgage markets. The double-digit year-on-year decline in the
volume of pure new mortgages continued at the start of the year
(80% in January). This will gradually help reduce core inflation
further.
Firms are facing increased costs of energy and commodities,
which is slowing investment growth. While the supply chain
problems are gradually easing, they continue to constrain
production in some segments of the economy. Tighter financial
conditions will also reduce external demand.
On the other hand, unemployment in the Czech Republic
remains low. In January, there were relatively significant
increases in nominal wages in industry (11.9% year on year) and
construction (14.9%). At its May meeting, the Bank Board will
thoroughly assess wage developments on the basis of new data,
analyses thereof, and surveys.
The effect of fiscal policy on economic activity will be
inflationary unless the government deficit is reduced.
The Bank Board assessed the risks and uncertainties of the
outlook as being significant and going in both directions. The
upside risks to inflation include faster-than-forecasted wage
growth (our forecast expects wage growth of 8.5% in the economy
as a whole this year) and more expansionary fiscal policy. The
threat of inflation expectations becoming unanchored remains a
significant risk in the same direction. By contrast, a
stronger-than-forecasted downturn in domestic consumer and
investment demand is a downside risk.
The persistence of inflation and hence its pace of decrease
towards the inflation target is a risk in both directions.
Volatility in global financial markets is an uncertainty in both
directions for the outlook for the monetary policy stance of
foreign central banks and for the degree of tightening of
financial conditions. The general uncertainties of the outlook
include the future course of the war in Ukraine, and the
availability and prices of energy.
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."
(Reporting by Prague newsroom)
PRAGUE, March 29 (Reuters) - The following is the Czech
central bank (CNB) board's statement following its monetary
policy meeting on Wednesday:
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