Czech Republic: Central Bank stays put, continues foreign exchange intervention
March 27, 2014
At its 27 March monetary policy meeting, the Czech National Bank's (CNB) board unanimously decided to leave the two-week repo rate unchanged at 0.05%, where it has been since November 2012. Moreover, monetary officials reiterated their commitment to intervening in the foreign exchange market in order to keep the Czech koruna at around CZK 27.0 per EUR. The markets had expected both decisions. In its statement, the CNB noted that economic activity expanded more than expected in the final quarter of 2013, mainly due to strong growth in investment, which had not been anticipated in the Bank's estimates. In addition, the Bank recognized that the economy bottomed out in the second half of 2013, but that the output gap is still “significantly negative”. In addition, the Bank pointed out that recent data suggests that the economic recovery is underway. Regarding price developments, monetary officials stated that inflation remains low and inflationary pressures are contained, mainly due to continued weakness in economic growth and a decline in wages. Nonetheless, the Bank indicated that inflation, while low, is still at positive levels mainly because the weakening of the exchange rate, “has so far been feeding through to prices in line with the forecast, and without this effect inflation would have been strongly negative.” The Bank concluded as follows: “the Bank Board stated at its meeting today that it expects the exchange rate to stay close to CZK 27 to the euro at least until early 2015,” while it added that, “If the future economic outlook requires a further easing of monetary policy to the extent indicated by the current assessment of risks, the Bank Board will prefer to keep the exchange rate commitment at CZK 27 to the euro for a longer period of time rather than change that level.” Jiri Skop, Economist at Komercni Banka said: We think the central bank will be further surprised on the downside in the case of inflation. However, the deviation will be not so strong as to change the floor; rather, the current floor will be in place for longer, in our view till the middle of next year. The first rate hike is unlikely to occur before Q116. Economists polled by FocusEconomics expect that the Central Bank will maintain the two-week repo interest rate unchanged at 0.05% until the end of 2014, with an average forecast of 0.06%. For 2015, participants see the two-week repo rate at 0.40%. Analysts expect the Czech koruna to trade at CZK 27.1 per EUR by the end of 2014. By the end of 2015, participants expect the koruna to trade at CZK 26.4 per EUR.
Author: Ricardo Aceves, Senior Economist