Czech Republic: Central Bank leaves rate unchanged, reaffirms currency ceiling
November 5, 2015
At its 5 November monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 24th 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, which will probably remain in place until late-2016. The ceiling for the exchange rate was set in November 2013 in order to relieve deflationary pressures and to lift inflation toward the Bank’s 2.0% target.
According to the Central Bank, inflation is far below the CNB’s 2.0% target and will only approach the target at the end of 2016 before exceeding it slightly in 2017. In the Bank’s assessment, the “sustainable fulfilment” of its inflation target will only be reached in early 2017, which is why it is likely that the CNB will maintain the one-sided currency commitment at least until end-2016. As for domestic developments, the Bank pointed out that inflation fell in Q3, mainly on the back of falling fuel prices and slower food inflation. According to the Bank, import prices were anti-inflationary recently, largely owing to falling producer prices in the Euro area and a drop in global commodity prices, and are only expected to turn slightly inflationary in the second half of 2016. Adding to this, the Bank sees that the expanding domestic economy will lead to a rise in wages and other input costs, which will eventually also fuel inflation. Regarding economic growth, the Bank noted that the Czech Republic accelerated in Q2 and that the expansion was balanced. For the remainder of the year, the Bank projects continued solid gains, boosted by cheap oil, loose monetary policy and rising public spending.
Regarding the international environment, the Bank said that it sees GDP growth in the Eurozone picking up and reaching values around 2.0% throughout the end of next year. Adding to this, the Bank sees inflation in the Euro area increasing due to strengthening demand and the effects of the oil price drop fading. Regarding the price of Brent crude oil, the Bank noted that it fell recently, but that it is expected to pick up slightly. Nevertheless, crude prices in the local currency will also be affected by the expected depreciation of the euro against the U.S. dollar. The next monetary policy meeting is scheduled for 16 December.