At its meeting today, the Bank Board left interest rates unchanged. The two-week repo rate thus remains at 3.75 %. All seven members of the Board voted in favour of the decision.
Today's decision reflects an updated inflation outlook, its risks and an assessment of new data. According to the update of the Monetary Section's forecast, inflation should be slightly above 2 % throughout this year and fall towards the inflation target next year. However, upside risks to inflation persist, requiring the continued operation of moderately restrictive monetary policy.
In particular, price growth in services remained elevated, reflecting both past cost shocks and currently brisk wage growth in this sector. Since the last monetary meeting, there has also been a substantial increase in the risks associated with tariff increases around the world. The possible introduction of retaliatory tariffs on US imports would work in the direction of higher prices for imported products. In addition, the newly announced plans for fiscal expansion in Germany reduce the likelihood of a negative scenario of a significant downturn in the German economy. The inflationary balance of risks to the outlook for meeting the inflation target has thus increased.
The aim of today's decision is to ensure that headline inflation is stabilised in the long term close to the 2% inflation target. This requires that the growth of the quantity of money in the economy does not accelerate excessively, or that credit growth remains moderate. This will help monetary policy to keep inflation low.
At its next meetings, the Board will base its assessment of the newly available data and their implications for the inflation outlook on the new data. The rate-setting considerations will depend mainly on an assessment of the persistence of the low-inflation environment, the exchange rate of the koruna, the effect of fiscal policy on the economy, an analysis of labour market tensions and developments in domestic and external demand. The Board will also monitor the actions of key foreign central banks, geopolitical events and developments in US-EU trade relations. The Board will also assess the transmission of interest rate cuts to credit activity, asset prices and, subsequently, to real economic activity and price developments.
The Board confirmed its commitment to continue monetary policy in order to keep inflation close to the 2% target in the long term. At present, this still requires a tighter monetary policy.
Economic development
GDP grew by 1.8 % yoy in the final quarter of 2024, 0.4 percentage point faster than forecasted in the February forecast. Household consumption in particular surprised, with its recovery gaining momentum. By contrast, external demand remained weak, which, together with subdued sentiment, led to low investment activity by firms.
Labour market tensions continue to persist. Average wages in market sectors grew by 8.3 % yoy in Q4, 0.6 percentage point faster than forecasted.
Inflation has been within the tolerance band of the CNB's target since last January and averaged 2.4 % last year, the lowest level in six years. At the start of this year, inflation was broadly in line with the forecast. In particular, services price inflation remains elevated, reflecting rapid wage growth.
Risks and uncertainties
The Board assessed the risks and uncertainties to the outlook for meeting the inflation target as inflationary in aggregate. Among the domestic risks to higher inflation, the risk of greater inertia in the growth of services and food prices persists. Any additional growth in overall public sector spending would lead to an inflationary risk from fiscal policy. Increased wage demands in the private and public sectors are also an inflationary risk. Over the longer term, a possible acceleration of money creation in the economy stemming from a further stronger recovery in credit activity, especially in the property market, is an upside risk to inflation. An inflationary risk from abroad, especially in the short term, is the risk of an escalation of trade wars. However, these could lead to a slowdown in global economic activity in the longer term. The risk of a significantly weaker performance of the German economy is partly mitigated by the upcoming fiscal stimulus by the new German government.
Legal mandatet
The Bank Board assures the public that the CNB's actions will be sufficient to maintain price stability in line with the legal mandate. At the same time, the Board is prepared to respond adequately to any risks to the inflation target outlook.
CNB/ gnews.cz - RoZ
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