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Czech Republic Monetary Policy June 2018

Czech Republic: Central Bank hikes key rate in June

At its 27 June meeting, the Bank Board of the Czech National Bank (CNB) unanimously decided to raise the two-week repo rate by 25 basis points to 1.00%, a move that surprised market analysts somewhat, as it came sooner than broadly expected. At the same time, the CNB increased the Lombard rate by 50 basis points to 2.00% and kept the discount rate unchanged at 0.05%. The Bank had kept the key policy rate at 0.75% since February.

The Bank’s decision was motivated by the build-up of inflationary pressures and a weakening koruna. Inflation has picked up so far in Q2 and exceeded the Bank’s 2.0% target in May, mainly as a result of higher oil prices. Moreover, and despite a mild slowdown, economic growth was still robust in Q1, which, coupled with an extremely tight labor market—the unemployment rate dipped to an all-time low in May—exerted sharp upward pressure on wages. Meanwhile, the Bank had expected a strengthening koruna to have delivered most of policy tightening this year. However, given it has been weaker than projected, it turned to be a key factor behind the Bank’s decision. All in all, higher-than-forecasted inflation, stronger inflationary pressures coming from abroad and a weaker-than-projected exchange rate prompted the Bank to tighten its policy stance.

Forward guidance for the future path of policy rates was not as clear cut in the Bank’s communiqué, despite the overall hawkish arguments behind its decision. Further tightening could be implemented, however, if inflationary pressures and koruna weakness persist. Some of our panelists are already expecting such scenario, as Pavel Sobisek, Chief Economist for Czech Republic and Slovakia at UniCredit, noted:

“The CNB showed today that its tolerance for a deviation in desired real monetary conditions is limited and this may also apply for the future […] We believe that another rate hike later this year is on the cards. The CNB is set to update its macroeconomic scenario by early August but, in our view, that may not bring a fundamental change to its economic outlook. Only minor adjustments will likely be made to GDP and inflation forecasts, meaning that the scenario will remain consistent with a gradual tightening of real monetary conditions.”

The next monetary policy meeting is scheduled for 2 August.

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