What does the term monetary policy mean in connection with the Czech National Bank (ČNB)? What are its main pillars, and what is the forecast for inflation in the coming period? 2022 was a hard year for many citizens, so these questions should definitely matter to us. Let’s take a look together at the basic concepts and the predictions coming from the ČNB’s macroeconomists.
So what does monetary policy mean?
The task, or goal, of monetary policy is to maintain price stability. Stability here does not mean zero inflation, but inflation that is slightly rising yet stable. If inflation rises, the ČNB’s job is to bring it back down towards 2%. This is exactly how a favourable environment is created for businesses and for rising living standards in the Czech Republic. The 2% level mentioned is therefore the ceiling that inflation in our country should not go above.
Regulation of the capital market
For the economy to function smoothly, the capital market needs to be stable and people need to trust it. We can only guarantee this through rules that we impose as part of capital market regulation. The ČNB has several legal regulations at its disposal, together with possible sanctions for breaches or other consequences.
This is how the ČNB oversees the capital market, strengthens investor confidence and, at the same time, provides them with the necessary protection. It develops the capital market this way and spreads awareness. This can also be understood as supporting market transparency, competitiveness, market discipline, support during crises, or strengthening public trust.
How does the ČNB achieve stable inflation?
The Czech National Bank tries to reach the mentioned 2% inflation target, for example by setting interest rates. These interest rates then feed through into market rates, affecting the development of the whole economy. The Bank Board (bankovní rada) decides on interest rates 8 times a year. It is a fairly demanding macroeconomic forecast, and it affects inflation for at least a year and at most a year and a half. So this is a very important task that affects developments across the whole country.
Forecast vs reality
According to the ČNB’s spring forecast, overall inflation in 2022 should be 13.1%, but we can already suspect it will probably be higher. The year-on-year increase is 17.2%, which in practice means that prices of goods and services are 17.2% higher than they were at this time last year. Last year, overall inflation was 3.4%, the highest inflation rate since 2008. According to the ČNB’s estimates, 2023 will bring an overall increase of 4.1%. From these numbers we can easily work out, even if maths was not our strong subject at school, that ordinary citizens will be noticeably worse off.
In general, though, we can say that 2022, due to the war and post-Covid measures, is so far the worst year in almost 14 years. Going forward, the situation should gradually improve, the question is how many citizens it will cost in terms of a decline in their standard of living, and so in the standard of living of the whole Czech Republic.
The chart above shows how inflation has developed from the start of 2022 to the present. We can also see the marked rise we are currently going through, and the estimated percentage increases in prices over the coming months. The question remains how accurate these predictions will turn out to be.
If you too have felt the effects of inflation and want to know how to become wealthy or how to pay off debt, check out some more great reading!
