Czech Republic: Central Bank stays put; announces to maintain exchange rate cap until the end of 2016
February 5, 2015
At its 5 February monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 18th consecutive meeting. The Central Bank also reaffirmed its commitment to intervene in the foreign exchange market in order to keep the Czech koruna at close to CZK 27.0 per EUR. The floor for the exchange rate was set in November 2013. In addition, the CNB stated that, according to its latest macroeconomic forecast, it will likely maintain the exchange rate cap as a policy instrument and keep the two-week repo rate at its current low level until the end of 2016, which is longer than had been planned.
The Bank expects that economic growth slowed down temporarily at the end of 2014 and in the outset of 2015, but that it will pick up gradually to reach 3.0% in 2016. According to the CNB, domestic demand will be fueled by a recovery in external demand, accommodative monetary policy, the low oil price and increased public spending. The Bank further expects that continued economic growth will lead to improvements in the labor market, including lower unemployment and increasing wages.
Regarding price developments, the Central Bank said that it now expects inflation to be, “considerably lower than in the previous prediction,” until the end of 2016. According to the Bank, inflation will moderate gradually and consumer prices will even decrease in Q3 2015, mainly as a result of the low international oil price, but also due to a temporary decrease in food prices. For 2016, the CNB sees inflation accelerating gradually and returning toward the 2.0% inflation target at the end of the year, as it expects the deflationary tendencies in the Euro area and the impact of the recent decline in oil prices to fade.
While the Central Bank stated that it will tolerate a temporary decrease in inflation, it also pointed out that it might change the level of the exchange rate cap to ensure that inflation converges towards the target rate in the longer term. The next monetary policy meeting is scheduled for 26 March.