Czech Republic Monetary Policy

Czech Republic

Czech Republic: Central Bank keeps rate on hold again; maintains currency ceiling

May 7, 2015

At its 7 May monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 20th consecutive meeting. The Central Bank also reaffirmed its one-sided commitment to intervene in the foreign exchange market in order to keep the Czech koruna from appreciating to below CZK 27.0 per EUR through the end of 2016. The ceiling for the exchange rate was set in November 2013.

According to the Bank, the Czech economy slowed down temporarily in the final quarter of 2014, but it is projected to speed up gradually this and next year, resulting from accommodative monetary conditions, improving external demand, a weak oil price and public spending. As for the labor market, the Bank projects that improved economic conditions will translate into a lower unemployment rate and a higher number of full-time positions, as well as higher wages.

Regarding price developments, the Central Bank noted that inflation was close to zero and well below the Bank’s target range at the outset of this year and stressed that the risks to the Bank’s current inflation forecast were “anti-inflationary”. The Bank foresees inflation remaining close to zero in the second half of this year, owing to lower administered prices, which will gradually figure in the weakened oil price. For 2016, the CNB sees inflation picking up toward its 2.0% target as the impact of the oil price shock on headline inflation and deflationary tendencies in the Eurozone are expected to fade.

While the Central Bank restated that it will tolerate a temporary decrease in inflation, it also reiterated that it might change the level of the exchange rate cap to ensure that inflation picks back up toward the target rate in the longer term. The next monetary policy meeting is scheduled for 25 June.

For 2015, FocusEconomics Consensus Forecast panel participants see the two-week repo rate at 0.05%. Analysts expect the Czech koruna to trade at CZK 27.6 per EUR at the end of 2015. For 2016, the panel expects the two-week repo rate to be 0.15% and see the koruna trading at CZK 27.0 per EUR.

Author: Teresa Kersting, Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy May 2015

Note: 2-week repo rate in %.
Source: Czech National Bank (CNB).

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