All in all, the economy has been making progress in consolidating its convergence to the 3% target over the two-year horizon. As for activity and demand, both have generally performed as projected. The main difference is observed in a larger-than-expected drop in the durable component of private consumption such as, for example, automobiles and household appliances. By economic sectors side, mining posted the biggest difference. The central scenario projections that I will detail in a few moments show modest changes in magnitude. On the growth side, for this year, we project that GDP will grow between -0.5% and +0.25%. In 2024 it will grow between 1.25% and 2.25%, and in 2025 between 2% and 3%. On the inflation side, the CPI annual variation will end this year at 4.2%, slightly less than forecast in March, to meet the 3% target during the second half of next year. Core inflation, that is, the CPI minus its volatile items, will end 2023 with an annual increase of 6.5%, also reaching 3% during the second half of next year. On the external front, activity began the year with greater dynamism and less financial volatility. Nevertheless, a scenario of tight financial conditions continues to be projected, in an environment where uncertainty remains high and a more contractionary policy is expected in the main economies considering the challenge of lowering inflation.
And fiscal policy was expansive for too long – we created a dangerous entitlement economy in which the state was the rich uncle who helped with almost everything. When an economy such as this one (especially one with a huge surplus of money and incomplete price convergence) was hit by a strong supplyside shock after the lockdowns, the Czech Republic ended up with the highest core inflation in the EU (from November 2021 to October 2022). We address the causes of inflation in the Czech Republic in our blog article (Adam and Michl, 2022). Bullard (2023) also wrote an article on this topic last week. The central bank's large balance sheet can lead to changes in monetary policy transmission. This is also because when key interest rates are raised, monetary policymaking expenses increase. We pay interest to commercial banks for their excess liquidity deposits. To give you an idea, the CNB paid CZK 14.7 billion to the banks in interest on deposited liquidity in April 2023, which may amount to CZK 180 billion for 2023 as a whole. This can lead to a change in the behaviour of banks, i.e. how and to whom they provide loans, by how much they raise deposit rates. In a system with excess liquidity, banks easily buy government bonds and government debt is monetised. An important lesson for me is that we will try not to repeat 2017 at the CNB and conduct monetary policy in a conventional manner.