Czech Republic: Central Bank leaves interest rates unchanged, intervenes in foreign exchange market
November 7, 2013
At its 7 November monetary policy meeting, the Board of the Czech National Bank (CNB) unanimously voted to leave the two-week repo rate unchanged at 0.05%, a decision the markets had expected. The CNB has kept the two-week repo rate at this record low since November 2012. Moreover, the Board decided that the Central Bank would intervene in the foreign exchange market in order to further ease monetary policy. Market analysts were surprised, as they had not expected the Bank to take this decision as early as it did. The Bank stated that, with the intervention, it aims to weaken the Czech koruna against the euro at around CZK 27.0 per EUR. The Bank pointed out that, in addition to ultra-low interest rates, the foreign exchange rate intervention is an effective instrument to increase inflation and move it nearer to the Bank's 2.0% target. The Bank reiterated its intention to intervene in the FX market, "in such volumes and for such duration as needed to reach the desired exchange rate level with the aim of hitting its inflation target in the future."
In its statement, the Bank underlined that inflation remains low (September: 1.0% year-on-year) and that it will fall to zero at the beginning of 2014 due to a decline in administered prices and the fading effects of the increase in the VAT rate earlier in 2013. The Bank expects the economy to contract in 2013, to rebound in 2014 and to accelerate in 2015. Monetary officials acknowledged that a gradual recovery has been under way since Q2 2013. The CNB pointed out that the exchange rate intervention will help return inflation closer to its target and that GDP growth will recover more quickly. The next policy meeting is scheduled for 17 December.
Analysts polled by FocusEconomics panelists expect that the Central Bank will maintain the two-week repo interest rate unchanged at 0.05% until the end of 2013, with an average forecast of 0.05%. For 2014, participants see the two-week repo rate at 0.15%. Meanwhile, forecasters expect the Czech koruna to trade at CZK 25.8 per EUR by the end of this year. By the end of 2014, participants expect the koruna to trade at CZK 25.3 per EUR.
Author: Ricardo Aceves, Senior Economist