Czech Republic: Central Bank holds its fire in March
March 29, 2018
The Bank Board of the Czech National Bank opted to leave the two-week repo rate unchanged at 0.75% at its 29 March meeting, while it also kept the Lombard rate at 1.50% and the discount rate at 0.05%. The decision was unanimous and met market expectations.
The decision was taken against a backdrop of a fast-growing economy coupled with the lowest rate of unemployment in the European Union, which spurred wage growth and kept inflation elevated throughout 2017. Although inflation eased in February and came in below the Central Bank’s 2.0% target range for the first time since December 2016, the Board opted to leave the two-week repo rate, its main monetary policy tool, unchanged. Moreover, the Bank expects inflation surpass 2.0% for the rest of the year, underpinned by robust labor market dynamics and rapidly rising wages. In addition, hard and soft data suggest that the strong economic momentum seen in 2017 carried over into the first quarter of this year.
The Bank considers there is a risk that inflation moderates faster than expected at the outset of the year. On the flip side, a stronger-than-expected appreciation of the koruna could act as a counterweight.
In terms of forward-looking guidance, the Bank’s communiqué struck a similar tone to that of the prior meeting. The Bank does not expect a rate hike before the end of the year with the major risk to the inflation forecast stemming from a more rapid easing of inflationary pressures.
The next monetary policy meeting is scheduled for 3 May.
Czech Republic Interest Rate Forecast
Against this backdrop, FocusEconomics Consensus Forecast panelists on average expect the two-week repo rate to rise further in 2018. The panel foresees the two-week repo rate to be 1.26% at the end of 2018, and projects it will increase further to 1.76% at the end of 2019.
Author: Jan Lammersen, Economist