The Monetary Council decided today to keep interest rates at their current levels. The two-week repo rate therefore remains at 3.75%. All seven members of the Monetary Council voted in favor of this decision.
Today's decision reflects an updated outlook for inflation, its risks, and an assessment of new data. According to the Monetary Department's updated forecast, inflation is expected to remain slightly above 2% throughout this year and to fall to the inflation target next year. However, inflationary risks persist, requiring a continuation of a moderately restrictive monetary policy.
In addition to the continued rise in service prices, which reflects both past cost shocks and the currently rapid growth in wages in this sector, there has also been a significant increase in the risks associated with rising tariffs worldwide since the last monetary policy meeting. The potential introduction of retaliatory tariffs on imports from the United States would lead to higher prices for imported goods. Furthermore, the recently announced plans for fiscal expansion in Germany reduce the likelihood of a negative scenario involving a significant decline in the German economy, thereby increasing the balance of inflationary risks for achieving the inflation target.
The goal of today's decision is to ensure that overall inflation remains stable at around the 2% inflation target in the long term. This requires that the growth of the money supply in the economy does not accelerate excessively, or that credit dynamics remain moderate. Monetary policy will thus contribute to maintaining low inflation.
At its upcoming meetings, the Monetary Council will base its decisions on the assessment of newly available data and their implications for the inflation outlook. Discussions about setting interest rates will be primarily based on the assessment of the persistence of the low-inflation environment, the development of the exchange rate, the impact of fiscal policy on the economy, the analysis of labor market tensions, and the development of domestic and foreign demand. The Monetary Council will also monitor the actions of key foreign central banks, geopolitical events, and developments in trade relations between the United States and the European Union. The Monetary Council will also assess the transmission of interest rate cuts to lending activity, asset prices, and subsequently to real economic activity and price developments.
The Monetary Council reaffirms its commitment to pursuing a monetary policy that keeps inflation close to the 2% target in the long term. This currently still requires a tighter monetary policy.
Economic Development
GDP in the last quarter of 2024 grew by 1.8% year-on-year. This growth was 0.4 percentage points faster than the February forecast. Household consumption, in particular, was surprisingly strong. In contrast, foreign demand remains weak, which, along with subdued sentiment, is leading to low investment activity by companies.
Tensions in the labor market persist. The average wage in the market sector grew by 8.3% year-on-year in the fourth quarter, which is 0.6 percentage points faster than the forecast.
Inflation has been within the Czech National Bank's (CNB) target range since January of last year, and averaged 2.4% last year, the lowest level in six years. At the beginning of this year, inflation developed roughly in line with the forecast. The main factor contributing to inflation is the continued rise in service prices, which is being driven by rapid wage growth.
Risks and Uncertainties
The Bank Board has assessed the risks and uncertainties surrounding the outlook for achieving the inflation target as pro-inflationary. Among the domestic risks that could lead to higher inflation, the risk of greater persistence in the growth of service and food prices remains. Any additional increase in overall public sector spending would pose a risk of inflationary pressure from fiscal policy. Increased wage demands in both the private and public sectors also represent an inflationary risk. Over a longer time horizon, the risk of accelerating money creation in the economy, stemming from a further significant increase in lending activity, particularly in the real estate market, is a potential inflationary factor. A risk of escalating trade wars, particularly in the short term, is an inflationary risk from abroad. However, in the longer term, these could lead to a slowdown in global economic activity. The risk of a significantly weaker performance by the German economy is partially mitigated by the fiscal stimulus being prepared by the new German government.
Legal Mandate
The Bank Board assures the public that the CNB's actions will be sufficient to maintain price stability in accordance with its legal mandate. The Bank Board is also prepared to respond appropriately to any realization of the risks outlined in the inflation target outlook.
CNB/ gnews.cz - RoZ
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