Czech Republic: Central Bank stays put, reaffirms currency ceiling
September 24, 2015
At its 24 September monetary policy meeting, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 23rd 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 until mid-2016 at least. 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.
The Bank’s recent reaffirmation of its commitment to the currency floor came amid increasing speculation that the CNB might abandon the koruna cap ahead of schedule. In July, the Central Bank had to intervene in the foreign-exchange market for the first time since the introduction of the currency cap in order to prevent an appreciation of the koruna below the 27.0 per euro mark. More recent data suggest that the Bank had continued intervening in August.
Regarding price developments, the Central Bank noted in its accompanying statement that inflation remained well below its 2.0% inflation target in August and fell short of the Bank’s projection. Lower food and fuel prices as well as lower administered energy prices are mainly keeping inflationary pressures muted. According to the Bank, a “sustainable fulfillment” of the inflation target will not be achieved before early 2017. In addition, the Bank stated that risks to its inflation forecast are anti-inflationary during the next quarters, even though the domestic economy is picking up.
In fact, the economy recorded the fastest expansion in over seven years in Q2. While the Bank noted that Q2 growth exceeded the Bank’s forecast mainly due to an unexpected strong restocking of inventories, in the Bank’s view, Q2 GDP growth was balanced, with household and government spending, fixed investment and the external sector all contributing to the expansion. As for the different economic sectors, industry continued to be the main driver of growth, but there are signs that activities linked to domestic demand strengthened. Moreover, the Bank pointed out that average wages continued to rise and that the unemployment rate fell in the second quarter. The next meeting is scheduled for 5 November.