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Czech Republic Monetary Policy November 2018

Czech Republic: Central Bank delivers fourth consecutive rate hike in November

At its 1 November meeting, the Bank Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 25 basis points to 1.75%, the fourth consecutive rate hike and a move widely expected by the market. At the same time, the CNB increased both the Lombard rate and discount rate by 25 basis points to 2.75% and 0.75%, respectively. Notably, five members of the Board voted in favor of the decision, one voted for leaving rates unchanged while the other voted to raise them higher.

The Board’s decision was motivated by the recent string of solid economic data and the weaker-than-projected appreciation of the koruna. Although inflation edged down to 2.3% in September (August: 2.5%), moving closer to the CNB’s 2.0% target, price pressures remain strong. Consumer confidence remains elevated, the job market is overheating—with the unemployment rate down at a record-low in September—and wages are buoyant, up 8.1% year-on-year in the second quarter. This, coupled with a weaker currency that has exerted upward pressure on import prices, have propped up prices overall. As a result, given the upward risks to inflation, the Bank opted to hike rates once again.

Looking ahead, the Bank projected that inflation will remain above target for the rest of the year and increase further in early-2019. After this period, however, inflationary pressures should subside amid rising interest rates, a renewed appreciation of the koruna and moderating wage growth, which should help bring inflation down to target in late 2019 and early 2020. It then sees it staying at target for the remainder of 2020. All in all, the Bank deemed the risks to the outlook to be inflationary, largely due to a koruna trading weaker-than-expected amid the continuation of emerging market risk-off sentiment. Thus, consistent with this outlook is the “continued rise in interest rates towards their long-run neutral level”, indicating that the Bank will tighten policy further going forward.

The next monetary policy meeting is scheduled for 20 December.

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