Czech Republic Monetary Policy December 2016

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at December meeting

December 22, 2016

At its meeting on 22 December, the Czech National Bank (CNB) decided to leave the two-week repo rate unchanged at its “technical zero” of 0.05%. The CNB also decided to continue using the exchange rate as a tool for easing monetary conditions and confirmed both its 27 CZK per EUR exchange rate floor and the asymmetric nature of the exchange rate commitment, which means that the koruna is not permitted to appreciate but is allowed to depreciate. The Bank therefore reaffirmed its commitment to intervene automatically on the markets to sell korunas and buy foreign currency in order to avoid an appreciation of the koruna. The CNB is using both near-zero interest rates and the currency floor to bring inflation closer to its 2.0% target. Recent data show that in November inflation returned to the lower band of the tolerance band around the Bank’s target for the first time in three years. As inflation will continue to rise but will nevertheless reach and slightly exceed the 2% inflation target only in late 2017, the CNB is maintaining expansionary monetary conditions.

The Bank reaffirmed that it will use the exchange rate floor as a monetary policy tool until Q2 2017, when inflation will approach target. Afterwards, the Bank considers it likely that it will return to conventional monetary policy. On the whole, the Bank expects that “inflation will increase further and slightly exceed the 2% target at the monetary policy horizon”.

The monetary authorities noted that economic growth decelerated further in Q3, as the contribution of net exports was lower than expected and investment declined due to a drop in EU co-financed investment. On the other hand, private consumption picked up pace and unemployment declined further, causing an acceleration in wage growth. Lastly, the CNB stated that, “the Bank Board assessed the risks to the current forecast at the monetary policy horizon as being balanced.”

The next meeting is scheduled for 2 February.

For 2017, FocusEconomics Consensus Forecast panel participants see the two-week repo rate at 0.09%. Analysts expect the Czech koruna to trade at CZK 26.4 per EUR at the end of 2017. For 2018, the Consensus Forecast for the two-week repo rate is 0.39% and panelists foresee the koruna trading at CZK 26 per EUR.

Author: Massimo Bassetti, Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy December 2016

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

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