Czech Republic Monetary Policy December 2018

Czech Republic

Czech Republic: Central Bank stands pat at last meeting of the year after four consecutive rate hikes

December 20, 2018

At its 20 December meeting, the Bank Board of the Czech National Bank (CNB) decided to keep the two-week repo rate unchanged at 1.75%, following four consecutive rate hikes. At the same time, the CNB left both the Lombard rate and discount rate unchanged at 2.75% and 0.75%, respectively. Notably, five members of the Board voted in favor of the decision, while the other two voted to raise rates.

The Board’s decision was motivated by weaker-than-expected economic growth in Q3 and declining inflation. GDP growth came in at an unremarkable 2.4% in Q3, weighed down by modest consumer spending and a weak contribution from the external sector. Meanwhile, inflation dropped for the third consecutive month in November and came in at 2.0%, matching the CNB’s target. That said, an extremely tight labor market continues to support strong wage growth, exerting notable inflationary pressures. This, coupled with a weaker currency that has exerted upward pressure on import prices, will support inflation going forward. On the other hand, downside risks come from the recent marked decline in oil prices. As a result, given balanced risks to inflation, the Bank opted to keep rates unchanged.

Looking ahead, the Bank projects that inflation will move above the target in early-2019. After this period, however, the Bank expects inflationary pressures to subside, supported by a renewed appreciation of the koruna, which it judges should help bring inflation down to target in late 2019 and early 2020. Consistent with this outlook is the “continued rise in interest rates towards their long-run neutral level”, indicating that the Bank will tighten policy further going forward.

The next monetary policy meeting is scheduled for 7 February.

Czech Republic Interest Rate Forecast

FocusEconomics Consensus Forecast panelists see the two-week repo rate at 2.13% at the end of 2019 and project it will increase to 2.30% at the end of 2020.

Author: Massimo Bassetti, Senior Economist

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Czech Republic Monetary Policy Chart

CzechRepublic Monetary Policy November 2018 1

Note: 2-week repo rate in %.
Source: Czech National Bank (CNB).

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