Czech Republic Monetary Policy February 2016

Czech Republic

Czech Republic: Central Bank stays put, delays exit from currency ceiling

February 4, 2016

In its first meeting of 2016 on 4 February, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 26th consecutive meeting. The Central Bank also reaffirmed its one-sided commitment to intervene in the foreign exchange market in order to keep the Czech koruna from appreciating to below CZK 27.0 per EUR. In addition, the Bank stated that it will likely maintain the currency cap until the first half of 2017, delaying the exit from the cap which was previously envisaged for the end of this year. The ceiling for the exchange rate was set in November 2013 in order to relieve deflationary pressures and to lift inflation toward the Bank’s 2.0% target. Moreover, in its February meeting, the Bank discussed the introduction of negative interest rates as a potential tool for additional monetary easing amid ultra-lose monetary policy in the euro area.

The CNB said that inflation continued to decline, approaching zero in the final quarter of last year. In the Bank’s view, inflation will increase only gradually from its current low levels, picking up to 2.0% in the first half of next year. The Bank added that a “sustainable fulfilment” of the inflation target—which the CNB sees as a condition for the removal of the currency cap—will only be achieved in the first half of 2017. As for economic growth, the Bank pointed out that the economy performed solidly in Q3 and GDP is projected to have recorded a sharp acceleration last year. While the Bank sees growth slowing markedly this year, mainly over lower public investment due to reduced EU funding, several factors, such as the weak koruna, expansionary monetary policy, rising external demand and a low oil price, will support still-solid growth. Moreover, the Bank expects unemployment to decrease and wages to pick up going forward. The next monetary policy meeting is scheduled for 31 March.

For 2016, FocusEconomics Consensus Forecast panel participants see the two-week repo rate holding at 0.09%. Analysts expect the Czech koruna to trade at CZK 26.9 per EUR at the end of 2016. For 2017, the Consensus Forecast for the two-week repo rate is 0.76% and panelists foresee the koruna trading at CZK 26.2 per EUR.

Author: Teresa Kersting, Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy February 2016

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

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