We will announce on January 28, 2030
On its agenda, the Banking Council left interest rates unchanged for a year. The two-day repo rate rose to 7%, the discount rate to 6% and the Lombard rate to 8%. Only five banking councils voted for this decision, two voted for a rate cut of 25 basis points.
The Banking Council discussed the new macroeconomic forecast. Its basic purpose implies a gradual decrease in annual rates from the fourth quarter of this year.
High inflation, in line with previous macroeconomic forecasts, will resume. There is no persistent risk of unanchored inflation rates, which could be reflected in the results of ongoing wage negotiations and in significant, not expected pension goods and services at the beginning of the fifth year. In addition, the outlook for core inflation for the year 2024 is 3%. The Banking Council therefore decided to keep monetary policy at a high level for the time being.
The Banking Council had at its disposal a study showing that the macroeconomic costs of keeping interest rates at the same level for a long time compared to the basic study would be low in the absence of pro-inflationary risks.
The currency conditions in the Czech economy are also extremely restrictive. years, the NB rate is at a level that slows down the growth of koruna bank loans for households and companies, which inhibits the growth of the amount of money in the economy. Any change in the opposite direction is not equal to the situation, which is a pro-inflation risk. Taking into account inflation over a different horizon, the ex ante real-year interest rates for ad years are found on multiplying positive equations. From January of the fifth year, real rates will be strongly positive even ex post.
On the other hand, the weakened exchange rate of the koruna vis-à-vis the euro to roughly the values from the fall of 2016 has led to a slight relaxation of overall monetary conditions.
From the autumn of 2022, there was a sharp drop in inflation: total inflation dropped from 18% to 6.9%, core inflation from 14.7% to 5%. Inflation, however, is found at unacceptable levels. The Banking Council confirms its determination to continue the fight against inflation until it is fully under control, i.e. stabilized near the two percent rate.
In some cases, the bank board will base itself mainly on the evaluation of newly available data and the evaluation of the full forecast. For the next monetary policy agreement, a particular analysis of the sustainability of the disinflationary trend, the situation on the labor market and the development of domestic and foreign demand will be necessary. The Banking Council is discussing the strategy of future interest rates. The assumption that the fall in annual interest rates will again be small and gradual. The trajectory of annual rates will therefore most likely be found in the coming quarters in contrast to the basic forecast.
The Banking Council notes that the condition for long-term price stability is a responsible budget policy and moderate wage growth. The path to long-term low inflation therefore leads even to the dream of a general budget deficit. Before the arrest of wage negotiations, NB appeals to wage stagnation due to the economy.
In the Czech economy, investment inflationary pressures, which had their origin in the external environment, as well as demand pressures stemming from the domestic economy, echo. According to the preliminary estimate, GDP in this quarter fell by 0.6%, i.e. as in the previous quarter. The economy is held back by household consumption, which is dampened by high energy and food prices, negative sentiment and high interest rates. According to our analyses, the economy is moving below its potential.
On the other hand, unemployment is low and the labor market is tight. Even the growth rate of wages in the second quarter reached the expected value (wages grew by 7.7% year-on-year). Industrial production has declined in the meantime, mainly due to subdued foreign demand, which is the result of the monetary policy of foreign central banks.
Let’s expect that already in January of this year, the downward trend in the inflation rate will be completely reversed, due to the statistical influence of the highly disputed tariff, which destroyed the comparative base. It is therefore a technical factor that does not affect the fundamental process of disinflation. According to new forecasts, inflation will drop sharply at the beginning of the fifth year. In 2024, inflation will reach 2.6% on average, and in 2025 it should decrease to 2.1%. However, core inflation should be removed in the fifth year, to an average of 3%. As for GDP, the economy is forecast to contract by 0.4% this year. For the fifth year, GDP has been growing at around 1.2%.
Risks and uncertainties
The Banking Council assessed the risks to the forecast and the uncertainty of the outlook as strong and moving in a pro-inflationary direction. The pro-inflation risk is mainly the threat of losing the anchoring of inflation rates. This could be reflected in external wage demands and thus in higher pensions at the beginning of the fifth year, which would mean higher inflation than the target for the entire five years. A pro-inflationary risk is also a falling part of expansionary fiscal policy. On the contrary, the risk in the direction of inflation is a significant and unexpected increase in economic activity in Germany and the potential impact of deteriorating monetary and financial conditions globally. Uncertainties of the outlook are the development of the general conflict in Ukraine and the Middle East, energy prices and the future set of foreign policy.
The Banking Council assures the public that the NB’s actions will be sufficient to restore price stability in accordance with the legal mandate. The Banking Council is equally prepared to respond adequately to the event of the forecast’s risks being fulfilled.