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Czech Republic Monetary Policy February 2018

Czech Republic: Central Bank increases interest rates at its first meeting of 2018

At its first meeting of the new year, held on 1 February, the Czech National Bank (CNB) unanimously decided to increase the two-week repo rate by 25 basis points to 0.75%, and the Lombard rate by 50 basis points to 1.50%; the discount rate was, however, left unchanged at 0.05%. The interest rate hike, which followed two rate hikes in August and November of last year, was widely expected by market analysts. Ahead of the announcement, the Czech koruna appreciated to its highest level against the euro since the low koruna policy was ended last year.

The decision to hike interest rates was taken amid a booming economy and above-target inflation (2.0%), which came in at 2.3% in 2017. Prices have been driven up on the back of strong economic growth, robust domestic and foreign demand, and rising wages. The labor market is expected to tighten further this year and next, which should lead to higher salaries. This, coupled with a solid outlook for domestic and external demand and a strong koruna, led the Bank to increase its interest rate to bring inflation down to its target level. However, the Bank does not expect inflation to return to target before the start of next year. In terms of risks to the inflation forecast, the Bank assessed the risks as balanced.

Concerning forward guidance, the Bank’s statement struck a similar tone to in its previous meetings, although it stated that a further interest rate hike is penciled in for this year. The two major risks to the inflation outlook stem from domestic inflationary pressures and the exchange rate developments.

The next monetary policy meeting is scheduled for 29 March.

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