Czech Republic Monetary Policy May 2017

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at May meeting

May 4, 2017

At its 4 May meeting, the Czech National Bank (CNB) decided to leave the two-week repo rate unchanged at its “technical zero” of 0.05%. The decision met market expectations, which see the CNB maintaining the current interest rate level until after the next parliamentary elections. The CNB used both near-zero interest rates and a currency floor to boost inflation from November 2013 until the extraordinary meeting held on 6 April, when it withdrew its 27.0 CZK per EUR exchange rate floor and announced that from then on the CZK would be allowed to float according to market demand and supply. The policy change was due to an inflation rate solidly above the CNB’s 2.0% target as well as to investors’ speculative over-positioning.

Inflation grew to an over four-year high of 2.6% in March after February’s 2.5%, thus moving further above the Central Bank’s target. Nevertheless, this is partly due to one-off factors, such as a low base effect for energy prices. In addition, as the CNB removed the currency floor it is possible that inflationary pressures will be partially offset by the anti-inflationary effects of lower import prices, as the koruna is forecast to appreciate going forward. As a result, the Bank maintained its current monetary stance as a further step towards a measured return to normal monetary conditions.

The statement provided clear forward guidance, as it explicitly signaled that the CNB will hike interest rates both in Q3 this year and in 2018. Moreover, the Bank also made it clear that it will continue to smooth excessive exchange rate fluctuations if needed. The Bank sees inflation remaining between 2.0% and 3.0% this year before returning to target at the start of 2018, which is in line with FocusEconomics’ forecasts.

Against this backdrop, the majority of FocusEconomics Consensus Forecast panelists expect the two-week repo rate to close this year unchanged. The panel nevertheless expects the two-week repo rate at an average level of 0.10% at the end of 2017 and projects it to increase further to 0.64% at the end of 2018.

Author: Massimo Bassetti, Economist

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