Czech Republic: Central Bank leaves rate unchanged, maintains currency cap
March 31, 2016
At its 31 March monetary policy meeting, the Czech National Bank (CNB) decided to keep the two-week repo rate at 0.05%, where it has sat since 1 June 2012. The decision, which was unanimous amongst board members, was widely expected by market participants. The decision has also quelled any rumors that the Bank may be following other central banks into negative interest rate territory. The board reiterated that it is utilizing intervention in the FX markets as a policy tool and that it is willing to intervene should the koruna strengthen beyond CZK 27.0 per Euro. The Bank stated that it expects that its main policy rate will be maintained at its current low level and that the exchange rate will be the monetary policy instrument of choice until mid-2017. This is later than the first “period” of 2017 as proposed during its February meeting.
Inflation eased from 0.6% in January to 0.5% in February, surprising the CNB on the downside as it had predicted higher inflation at the start of the year. GDP growth in Q4 also disappointed as it also came in below the CNB’s forecasts. These indicators, as well as subdued investment and export figures, had some analysts wondering if the Bank would abandon its current regime and lower its main policy rate to sub-zero levels. Although the Bank claimed to have discussed the possibility of employing negative interest rates in order to bolster inflation and stimulate the economy, it decided that the current stance was appropriate and would only employ negative rates if it felt the currency was in danger of appreciating excessively. However, pressure on the koruna appears to be abating and the CNB found that it had to intervene less in March than in the past in order to keep the currency above the threshold of CZK 27.0 per Euro.
Meanwhile, the CNB pointed out that the domestic economy had grown more slowly than expected in 2015 due to an unforeseen decrease in gross capital formation growth. Labor market dynamics were evolving broadly in line with the Bank’s previous forecasts, however, wage growth in the business sector was much lower than expectations in Q4. The CNB decreased its outlook for inflation in 2016 by 0.5 percentage points to 0.6%, mainly due to a continued decline in energy prices. It added that there was a “slightly anti-inflationary balance of risks to the current forecast.” The CNB further elaborated on these risks, stating that, “in particular, markedly lower observed domestic and foreign inflation and slower wage growth in the Czech economy are acting in this direction. The short-term food price outlook is also a downside risk to inflation”.
Author: Robert Hill, Economist