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Czech Republic Monetary Policy November 2023

Czech Republic: Czech National Bank postpones policy easing on fears of wage-price spiral

At its 2 November meeting, the Board of the Czech National Bank (CNB) left the two-week repo rate unchanged at 7.00%, surprising markets, which had expected the Bank to trigger an easing cycle in November. In addition, the CNB left both the Lombard rate and the discount rate unchanged at 8.00% and 6.00%, respectively. Five board members voted to leave rates unchanged, while two voted for a 25 basis point cut.

The Bank decided to stand pat due to risks of unanchored inflation expectations feeding through to the ongoing wage bargaining process, thus triggering a wage-price spiral. Moreover, another factor behind the decision to delay the start of the easing cycle was that core inflation is expected to be stickier and average above 3.0% in 2024. That said, the CNB expects inflation to fall significantly at the start of 2024, and it sees it averaging 2.6% next year and 2.1% in 2025.

Looking ahead, the Bank said that, according to its macroeconomic forecasts, it expects “a gradual decline in interest rates from 2023 Q4 onwards”. That said, the CNB also added that it will base its decisions on incoming data and its alignment with the Bank’s macroeconomic expectations. Our panelists expect the CNB to begin monetary easing by end-2023, and no panelists see further rate hikes from current levels.

The Bank’s next meeting will be on 21 December.

On the outlook, ING’s Frantisek Taborsky stated:

“Today’s CNB meeting did not reveal much about what conditions the board wants to see for the start of the cutting cycle and given the governor’s emphasis on higher inflation in the next three prints, we slightly prefer February to December [as the beginning of the cycle].”

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