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Czech Republic Monetary Policy February 2019

Czech Republic: Central Bank stays put amid heightened external uncertainty

At its first meeting of the year on 7 February, the Bank Board of the Czech National Bank (CNB) kept the two-week repo rate unchanged at 1.75%, marking the second consecutive “hold”. 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 by 25 basis points.

The Board’s decision was motivated by the change in its macroeconomic outlook, with its inflation projection shifting slightly lower compared to the November 2018 forecast. The shift was in part due to inflation remaining in check in recent months, which came in at the CNB’s 2.0% target in both November and December. In addition, although growth remains strong and in line with rates rising to their neutral level, heightened external uncertainty underpinned the Bank’s cautious approach.

The Board expects inflation to edge higher in the coming months but remaining close to its target thereafter. That said, it noted that inflationary risks are tilted to the upside, with pressure stemming from a weaker-than-expected appreciation of the koruna and effects from a disorderly Brexit. In terms of forward guidance, the Bank sees a stronger koruna delivering most of the tightening this year. Nevertheless, it has left the door open for further rate hikes this year in case this does not materialize.

The next monetary policy meeting is scheduled for 28 March.

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