At the 21 March meeting of the Bank Council, the Board of the Czech Central Bank (Česká národní banka) announced its decision to reduce the main repo rate by half a percentage point to 5.75%. At the same time it decided to reduce the discount rate to 4.75% and the deposit rate to 6.75%.
Decision
This decision reflects the Council’s assessment of the February macroeconomic forecast. Despite inflation falling to 2.3% at the start of the year, close to the 2% target, the ČNB opted to maintain a restrictive monetary policy in anticipation of potential future increases. A consensus of 5 out of 7 members expressed a preference for a moderate reduction in interest rates, highlighting a willingness to implement a more controlled strategy.
The future direction of interest rates will be guided by the assessment of emerging data and their impact on inflation. Additional factors such as the crown exchange rate, new tax regulations and labour market dynamics will influence future decisions. Despite the reductions made since December, the bank is reluctant to significantly reduce interest rates determined to pursue the 2% inflation target.
Economic Developments
According to the ČNB’s assessments, the Czech economy has not reached its full potential. Although GDP showed 0.2% growth in the last quarter of the previous year, exceeding expectations of stagnation, household consumption, although higher, remains below pre-pandemic levels. Current projections point to sustained real GDP growth in the first quarter, thanks to lower inflation and higher real household income, also confirmed by an increase in retail sales in December and January. In 2025, real GDP is projected to grow from 0.4% to 1.3%.
This positive trend is also determined by the labour market which, despite some slackening, is characterised by a low unemployment rate of 4 % and a 6.3 % wage increase in the last quarter, in line with expectations. However, the situation is not much better due to the restrictive monetary policy of the major banks and some government measures for the energy crisis that slow down foreign demand.
Risks and uncertainties
The Council identified several risks and uncertainties in the economic projections, tilting towards scenarios that could lead to moderately higher inflation. These risks include the possibility of higher wage demands, in an inflexible labour market environment, and higher-than-expected service prices, leading to a slowdown in the deflationary process for trade goods. The value of the local currency could also influence inflation by increasing the costs of imported goods. In the long run, a potential reduction in inflation could result from stronger lending, while negative effects could arise from a decline in global economic activity and less favourable developments in the German economy.
Adopting a cautious and restrictive monetary policy, the ČNB aims to reach the inflation target in the second half of the year, hoping to fall below it in 2025. At the same time, Gross Domestic Product (GDP) growth is anticipated to exceed 2%. This growth outlook manifests itself despite expectations of a prolonged period of weakness in the CZK/EUR exchange rate, which is still higher than the levels recorded the previous year.
The ČNB also expects further interest rate cuts in the coming months. As emphasised by Radomír Jáč, analyst at Generali Investments, the softening of monetary conditions by lowering interest rates should stimulate an increase in mortgage lending and, consequently, stimulate a recovery in domestic demand within the Czech economy. These strategic moves by the ČNB are thus aimed at strengthening the national economy, steering the country towards a stable and sustained growth path.
Source: https://www.cnb.cz/ https://www.camic.cz/
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