Czech Republic Monetary Policy June 2017

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at June meeting

June 29, 2017

At its 29 June meeting, the Czech National Bank (CNB) decided unanimously to leave the two-week repo rate unchanged at its “technical zero” of 0.05%, meeting market expectations. The CNB is seeking to return to normal monetary conditions, the first step being the withdrawal of its 27.0 CZK per EUR exchange rate floor in an extraordinary meeting on 6 April, combined with the announcement that from then on the CZK would be allowed to float according to market demand and supply. The Bank had used both near-zero interest rates and a currency floor to boost inflation from November 2013 until last April’s extraordinary meeting. The policy change became necessary as the inflation rate had risen solidly above the CNB’s 2.0% target, prompting investors to build heavy speculative positions.

Although inflation grew to 2.4% in May after April’s 2.0%, thus moving once again above the Central Bank’s target, cost-push inflationary pressures should be dampened by a more pessimistic market outlook for oil prices, as the per barrel price is put under pressure by continuing excess supply, which should lower energy costs. In addition, the appreciation of the koruna that followed the end of the floor has produced anti-inflationary effects through lower import prices, reinforcing the effect of lower crude prices. These factors encouraged the Bank to keep rates constant this time around. On the other hand, robust demand-pull price pressures persist due to higher wages.

The statement provided clear forward guidance, as it explicitly signaled that the CNB will begin a hiking cycle in Q3 which will continue into 2018. The Bank expects inflation to remain above the target until the end of 2017, before declining towards the target at the start of 2018, which is in line with FocusEconomics’ forecasts. Stronger-than-expected economic expansion and wage growth, together with a weaker koruna, could drive inflation higher, while lower oil prices represent the main downside risk to inflation.

Against this backdrop, the majority of FocusEconomics Consensus Forecast panelists expect the two-week repo rate to increase by the end of this year. The panel foresees the two-week repo rate at an average level of 0.14% at the end of 2017 and projects it to increase further to 0.68 at the end of 2018.

Author: Massimo Bassetti, Economist

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