Czech Republic Monetary Policy September 2016

Czech Republic

Czech Republic: Central Bank keeps rates unchanged at September meeting

September 29, 2016

At its meeting on 29 September, the Czech National Bank (CNB) decided to leave the two-week repo rate unchanged at its so-called “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, which the koruna is not permitted to appreciate beyond. 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 it is being affected by external anti-inflationary cost effects, meaning that the CNB can maintain expansionary monetary conditions.

The Bank reaffirmed that it will use the exchange rate floor as a monetary policy tool until mid-2017, when the inflation target should be fulfilled. Afterwards, the Bank considers it likely that it will return to conventional monetary policy. On the whole, the Bank expects that inflation “will slightly exceed the 2% target at the monetary policy horizon and then return to it from above”.

The monetary authorities observed that data for the Czech economy paint a mixed picture. On the one hand, economic growth decelerated in Q2, on the back of declining investment, and the available economic indicators for Q3 point to a continuing economic deceleration, as shown by data on industrial production and construction. On the other hand, retail sales have maintained solid growth, wages continue to rise and the labor market remains solid. Lastly, the CNB stated that, “taking into account all the newly available information, the Bank Board assessed the risks to the current forecast at the monetary policy horizon as being balanced.”

The next meeting is scheduled for 3 November.

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, Senior Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy September 2016

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

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