Czech Republic: Central Bank raises rates for first time in nine years in response to stronger growth forecasts
August 3, 2017
At its 3 August meeting, the Czech National Bank (CNB) voted unanimously to raise the two-week repo rate by 20 basis points to 0.25% and the Lombard rate by 25 basis points to 0.50%. The discount rate was left steady at 0.05%. The decision came after the Bank announced its intention to raise rates in the previous meeting and was consistent with expectations of above-target inflation and the adjustments made to its economic forecasts. August’s hike represents the first in nine years.
The rate change was encouraged by the Bank’s positive outlook on the future growth of the Czech economy as they raised their growth prospects to 3.6% for 2017 (previous forecast: +2.9%). The CNB named higher rates of consumption and investment as the main drivers of the change in their forecasts. Continued growth in exports will also buttress a stronger GDP growth. That said, the Bank expressed that it felt the economy was in strong enough shape to withstand the start of a tightening cycle, one that the Bank assured would come very gradually and be dependent on future data. The CNB spoke of the very low unemployment rates, high wages, and high housing prices as factors that supported the decision.
On the price side, the Bank’s new forecasts see inflation staying within the upper half of the tolerance band for the remainder of the year, then falling towards the 2.0% target in early 2018. The CNB believes that inflationary pressures are hitting a peak and will eventually begin to ease. The Bank expects core inflation to remain stable around 2.0%. The decision also backs on the strengthening of the koruna against the euro and the Bank forecasts that it will continue to strengthen.
Despite the rate increase and the upbeat outlook, the meeting struck a rather dovish tone. Although the Bank made clear its agenda to begin to normalize interest rates and evoke further tightening policies in the future, no future rate hikes were determined at the time and officials seemed mindful about further strengthening of the koruna. In addition, the CNB noted that all future decisions will also depend on the ECB’s own monetary policy stance and whether the ECB will begin to shift out of its ultra-accommodative stance.
Author: Lindsey Ice, Economist