Czech Republic Monetary Policy November 2016

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at November meeting

November 3, 2016

At its meeting on 3 November, 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 its 27 CZK per EUR exchange rate floor, beyond which the koruna is not permitted to appreciate. The Bank also reaffirmed its commitment to intervene as much as required 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 indicate that inflation is still below target. However, it is starting to rise as external anti-inflationary cost effects from abroad begin to vanish. As inflation will continue to rise but will nevertheless reach and slightly exceed the 2% inflation target only in late 2017, the CNB maintains expansionary monetary conditions.

The Bank reaffirmed that it will use the exchange rate floor as a monetary policy tool until Q2 2017, when the inflation target should be approached. 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 [and then] it will return to the target from above [during 2018]”.

The monetary authorities revised the growth forecast for the Czech Republic upwards for 2016, projecting an expansion of 2.8%. They noted that economic growth decelerated slightly in Q2, on the back of a temporary decline in government and corporate investment co-financed from EU funds. On the other hand, expansionary monetary conditions, low commodity prices and strong external demand continue to support the economy, with economic growth projected to maintain its current pace for the next two years. Lastly, the CNB stated that, “the Bank Board assessed the risks to the inflation forecast at the monetary policy horizon as being balanced.”

The next meeting is scheduled for 22 December.

For 2016, FocusEconomics Consensus Forecast panel participants see the two-week repo rate holding at 0.12%. Analysts expect the Czech koruna to trade at CZK 27.0 per EUR at the end of 2016. For 2017, the Consensus Forecast for the two-week repo rate is 0.49% and panelists foresee the koruna trading at CZK 26.3 per EUR.

Author: Massimo Bassetti, Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy November 2016

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

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