Czech Republic Monetary Policy February 2017

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at February meeting

February 2, 2017

At its meeting on 2 February, 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. Moreover, the Bank confirmed both its 27 CZK per EUR exchange rate floor and the asymmetric nature of the exchange rate commitment, which means that the koruna can depreciate but not appreciate. The Bank therefore reaffirmed its commitment to intervene in the markets automatically and without limits 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 December inflation increased sharply and returned to the Bank’s target. As the Bank expects that the conditions for a stable fulfillment of the target will be met only starting from mid-2017, the CNB considers it appropriate to prolong the current expansionary monetary conditions.

The Bank reaffirmed that it will use the exchange rate floor as a monetary policy tool until Q2 2017, when it expects inflation to steadily 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 into the upper half of the tolerance band around the target. It will then return to the 2% target from above at the monetary policy horizon, i.e. in the first half of next year.” On the one hand, rising wages will push up inflation, while on the other hand, the expected appreciation of the koruna after discontinuation of the use of the exchange rate as a monetary policy instrument will keep external price pressures at bay.

The monetary authorities noted that economic growth weakened further in Q3, and estimate that it reached 2.4% in full year 2016. The Bank also expects growth to accelerate to almost 3.0% this year and next, supported by strong external demand, growing government investment and expansionary monetary conditions. Lastly, the CNB stated that, “the Bank Board assessed the risks to the forecast at the monetary policy horizon as being balanced. The main uncertainty is the evolution of the koruna exchange rate following the exit from the exchange rate commitment.”

The next meeting is scheduled for 30 March.

For 2017, FocusEconomics Consensus Forecast panel participants see the two-week repo rate at 0.07%. 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, Senior Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy February 2017

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

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