During the negotiations on rates, the CNB was concerned about price adjustments due to rising energy costs

Prague – The Banking Council of the CNB during the negotiations on the setting of interest rates last week expressed concerns about the January price list changes and with regard to the expected increase in energy prices. According to her, this could increase inflation for the coming period. Board members also discussed an alternative forecast scenario that calls for stable rates through the end of the first quarter of next year. This follows from the record that the central bank published today. The Banking Council left the key interest rate at seven percent last week, despite some market expectations for the first rate cut.

Shortly before the meeting of the Bank Board, the Energy Regulatory Office (ERÚ) announced its intention to significantly increase the regulated component of energy prices next year. CNB Vice-Governor Eva Zamrazilová stated that the extent of the price increase is in line with the central bank’s forecast, but not with the expectations of businesses. With their statements, according to Zamrazilová, they are creating space for another wave of price increases. Bank board member Karina Kubelková also pointed out that if companies translate price hikes into price increases and not into reduced margins, it may accelerate inflation in the future.

According to Zamrazilová, inflation data from the last three months of the year could also contribute to a more significant increase in prices in January. Compared to the September values, it will accelerate due to a statistical effect, when last year the Czech Statistical Office (ČSÚ) counted the government’s energy-saving tariff as a discount on electricity, which will not have an effect this year. According to the vice-governor, companies could react to the data with higher inflation expectations, which would subsequently make them adjust their price lists more significantly.

The basic scenario of the CNB’s forecast envisages a rate cut, but council members also considered an alternative scenario that took into account higher inflation expectations and thus more significant changes in January price lists. According to him, the rates should remain unchanged until the end of the first quarter of 2024. Council member Tomáš Holub pointed out, however, that if January inflation was close to two percent and the base interest rate was still at seven percent, the CNB would then have to reduce rates in more drastic steps.

The Banking Council also addressed the impact of rate setting on the real economy. While Holub pointed out that due to the expected slowdown in inflation, the Czech Republic could be exposed to excessively strict monetary conditions, according to Zamrazilová and council members Jan Kubíček and Jan Procházka, keeping rates at their current level until the beginning of next year should not jeopardize the export performance of the economy. At the same time, Zamrazilová pointed out that exports are the backbone of the Czech economy.

Holub and Vice-Governor Jan Frait voted for a reduction of the basic interest rate by 0.25 percentage points. Other members of the bank board supported keeping rates at the current level.

CR CNB rate council