Czech Republic: Central Bank delivers third consecutive rate hike in September
At its 26 September meeting, the Bank Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 25 basis points to 1.50%, the third 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 2.50% and 0.50%, respectively. Notably, one of the seven members of the Board voted to leave rates unchanged, in slight contrast to the past two meetings where the decision to hike came unanimously.
The Bank’s decision was motivated by recent economic developments coming closely in line with its August’s macroeconomic forecast. After edging down from 2.6% in June to 2.3% in July, inflation rose again to 2.5% in August, coming in just slightly below the Bank’s forecast. Moreover, the extremely tight labor market has generated inflationary and wage pressures recently, also in line with the Bank’s assumptions. On the external front, after depreciating in recent months due to emerging market riskoff sentiment and rising U.S. interest rates, the koruna regained strength in September and has trended only marginally stronger than expected. Meanwhile, although the economy slowed in Q2, as anticipated by the Bank, available data points to still-solid dynamics in Q3.
Looking ahead, the Bank assessed that inflation will remain above its 2.0% target for the rest of the year and only return to target until the second half of 2019. The Bank noted that its outlook is consistent with a “continued rise in interest rates towards their long-run neutral level”, hence suggesting additional tightening ahead. However, in the press conference, Governor Rusnok’s remarks regarding the timing of future hikes were somewhat ambiguous. Although the market had already priced in a further hike by the end of the year, Rusnok’s statements left a question mark over whether the Bank will actually deliver it. Given the solid domestic economic conditions and expectations that they will continue, which would justify tightening, the decision to do so will likely depend on how the exchange rate evolves, namely if the koruna trends weaker than anticipated.
The next monetary policy meeting is scheduled for 1 November.