Czech Republic: Central Bank leaves rate unchanged again; reaffirms currency ceiling
August 6, 2015
At its 6 August monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 22nd 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 until mid-2016 at least. The ceiling for the exchange rate was set in November 2013 in order to relieve deflationary pressures and to steer inflation toward the Bank’s 2.0% target. In July, the Central Bank had to intervene in the foreign-exchange market for the first time since the introduction of the currency cap in order to prevent an appreciation of the koruna below the 27.0 per euro mark as rising domestic demand and strengthening exports sped up economic growth. The Bank’s recent reaffirmation of its commitment to the currency ceiling comes amid increasing political pressure to abandon the cap and allow a strengthening against the euro. Politicians criticized the ceiling for leading to higher prices for imported goods and holidays abroad.
Regarding price developments, the Central Bank noted in its accompanying statement that inflation remains well below its 2.0% inflation target and foresees that a “sustainable fulfilment” of its target will not be achieved before early 2017, which is why it expects that maintaining loose monetary conditions and the currency ceiling will be necessary until the end of 2016 at least. The Bank added that the recent appreciation of the koruna was, “an unfavourable factor that is tightening the monetary conditions and hence postponing achievement of the inflation target.” Going forward, while the Central Bank expects that the fading of one-off effects will drag down inflation in Q2 and Q3, other factors–such as increasing wages and the vanishing of anti-inflationary import prices–will contribute to a gradual pickup in inflation.
In addition, the Bank noted that the Czech Republic recorded a notable economic expansion in Q1, boosted by a strong domestic economy which more than compensated for a weak external sector. However, according to the Bank, the output gap was still negative, but was narrowing gradually. The Bank sees that the economy will record a solid expansion this year, helped by strengthening external demand, still low oil prices, loose monetary policy, a strengthening labor market and increasing public investment. For next year, the Bank sees growth moderating as it projects that oil prices will pick up, one-off effects related to exceptionally high inventories in Q1 will fade and public investment will moderate. The next meeting is scheduled for 24 September.