Czech Republic: Central Bank leaves rate unchanged again and maintains currency ceiling
June 25, 2015
At its 25 June monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 21st consecutive meeting. The Central Bank also reaffirmed its one-sided commitment to intervene in the foreign exchange market in order to keep the Czech koruna from appreciating to below CZK 27.0 per EUR through the end of 2016. The ceiling for the exchange rate was set in November 2013.
According to the Bank, the Czech economy recorded notable economic growth in the first quarter of this year, which markedly exceeded the Central Bank’s expectations. Q1’s strong reading was driven to a large extent by increasing inventories and also partly due to one-off factors. Nonetheless, the Bank also pointed out that the remaining GDP components, except for net exports, also contributed positively to Q1 growth and sees that growth in this year might come in above its current forecast. In addition, the Bank stated that the labor market continued to improve, with the number of unemployed persons dropping to the lowest level since June 2009 in May, and it expects that dynamic GDP growth will continue to support employment going forward. In the Bank’s view, industrial production and retail sales also performed solidly, pointing to, “ongoing robust economic growth”.
Regarding price developments, the Central Bank noted that inflation rose in the last two months, driven by higher prices of most of the CPI components, particularly food. While the Central Bank stated that rapid economic growth, improvements in the labor market and the depreciation of the koruna against the U.S. dollar were driving inflation up, at the same time the Bank also noted that subdued inflation abroad and weak imported inflation had exerted the opposite effect. As a result, the Central Bank projects inflation in the next 12 months to exceed its current forecast, but to stay below its 2.0% inflation target.
While the Central Bank restated that it remains ready to change the level of the exchange rate cap to ensure that inflation picks back up toward the target rate in the longer term should this prove necessary, it also pointed out that the probability of such a move had become less likely now versus in the previous monetary policy meeting. The next meeting is scheduled for 6 August.