Czech Republic: Central Bank keeps rates unchanged at March meeting
March 31, 2017
At its 30 March meeting, 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 decision met market expectations, which mostly see the CNB scrapping the floor at its meeting in May. The CNB is using both near-zero interest rates and the currency floor to bring inflation steadily close to its 2.0% target. The Bank started to use the exchange rate as an additional monetary tool to boost inflation in November 2013, after the interest rate was set to its current “technical zero” and the Bank had no other instruments to influence inflation expectations.
Inflation grew to an over four-year high of 2.5% in February after January’s 2.2%, thus moving further above the Central Bank’s target of 2.0%. Nevertheless, both GDP growth in Q4 and wage growth at the end of 2016 were lower than expected. This allowed the Bank to maintain an expansionary stance in order to sustain the current phase of economic expansion. In its accompanying statement, the Bank outlined that the decision is consistent with a stable and sustainable fulfilment of the 2.0% inflation target in the future.
The statement provided quite clear forward guidance, as it signaled that the end of the “hard commitment” to the floor is approaching. Nevertheless, the Bank also made it clear that the return to the conventional monetary policy regime will be handled carefully in order to avoid sudden exchange rate fluctuations. The Bank has had to intervene massively in recent months to maintain the exchange rate floor, and the emphasis on a gradual transition is meant to reassure markets that the CNB will not allow the exchange rate to be destabilized by a sharp positioning squeeze.