Statement of the Bank Board for the press conference following the monetary policy meeting

Decision

At its meeting today, the Bank Board lowered the two-week repo rate by 0.25 percentage point to 3.5%. It also lowered the other key interest rates by the same amount. Six members voted in favour of this decision, and one member voted for leaving rates unchanged.

The Monetary Department’s new macroeconomic forecast, which was published today, also assumes a decline in interest rates in 2025 Q2, followed by broadly stable rates.

Inflation has been inside the tolerance band around the CNB’s target since January 2024. Global commodity prices have declined substantially this year and international institutions have lowered their forecasts for global economic growth. However, services inflation in the domestic economy remains elevated. Wage growth is also above average. Property prices have also increased significantly. These factors pose risks to long-term price stability. Therefore, today’s step is only very cautious and monetary policy remains and will remain tight – real rates are distinctly positive both ex post and ex ante. Persisting stronger inflation pressures from the domestic economy are limiting room for further rate cuts.

Uncertainty on the financial markets has led to a tightening of global financial conditions. The impacts of the changes to international trade barriers alone cannot be reliably assessed at the moment, above all because the specific form of these changes is unknown. Their effects on economic growth and inflation in the medium and long term also remain uncertain. The future reaction of fiscal policy and major central banks is not known either. However, the Bank Board’s considerations involve various possible scenarios.

Today’s decision aims to stabilise headline inflation close to the 2% inflation target in the long run. This requires growth in the quantity of money in the economy not to accelerate excessively and credit growth to remain moderate. By ensuring this, monetary policy will help keep inflation low.

At its meetings ahead, the Bank Board will base its decisions on an assessment of newly available data and their implications for the inflation outlook. Its considerations about the interest rate settings will depend mainly on an evaluation of the persistence of the low-inflation environment, koruna exchange rate developments, the effect of fiscal policy on the economy, an analysis of the tightness in the labour market, and changes in domestic and external demand. The Bank Board will also monitor the actions of key foreign central banks, geopolitical events and developments in trade relations between the USA and Europe. It will also assess the transmission of interest rate cuts to lending activity, asset prices and subsequently real economic activity and prices.

The Bank Board confirms its determination to continue its monetary policy in order to maintain inflation near the 2% target in the long term. At present, this still requires relatively tight monetary policy.

Economic developments

The Czech economy is gradually recovering. According to the CZSO’s flash estimate, GDP rose by 0.5% quarter on quarter and by 2% year on year in 2025 Q1.

Growth is being driven mainly by household consumption, which is being supported by renewed real income growth and moderation of monetary policy restriction. On the other hand, external demand remains subdued, mainly due to the decline in European industry. The latter is facing high energy prices, structural problems and uncertainty relating to US trade policy.

Unemployment remains low. Average wage growth in market sectors stood at 8.3% year on year in 2024 Q4, remaining elevated from a historical perspective. It is also one of the reasons for the inertia in services inflation.

Outlook

According to the Monetary Department’s forecast, inflation will be inside the tolerance band for the rest of this year and next year but will remain slightly above the inflation target. Inflation will reach 2.5% on average this year and decrease to 2.2% next year. According to yesterday’s flash estimate from the CZSO, inflation fell to 1.8% in April. However, the assessment of the elevated inflation pressures from the domestic economy remains unchanged due to an upswing in year-on-year services inflation.

According to the Monetary Department’s forecast, Czech GDP will grow by 2% this year (as in the previous forecast), driven mainly by household consumption. By contrast, net exports will have a negative effect on the economy. Economic growth will accelerate slightly to 2.1% next year (2.4% in the previous forecast).

Risks and uncertainties

The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as modestly inflationary overall. As regards domestic inflationary risks, the risk of higher-than-expected inertia in services and food inflation persists. Potential additional growth in total public sector spending would lead to a risk of fiscal policy having an inflationary effect. Increased wage demands in the private and public sector are an additional upside risk. An inflationary risk in the longer term is a potential acceleration of money creation in the economy stemming from a further stronger recovery in lending activity, especially on the property market. Increasing barriers to international trade are a downside risk to global economic activity. However, the impact on inflation is not clear cut, especially in the longer term. The risk of markedly weaker German economic output is partly offset by the planned fiscal stimulus of the new German government.

Statutory mandate

The Bank Board assures the public that the CNB’s actions will be sufficient to maintain price stability in accordance with its statutory mandate. In addition, the Bank Board is ready to react appropriately to any materialisation of the risks of the outlook for the fulfilment of the inflation target.