Czech Republic: Central Bank unexpectedly cuts rates to new record-low
November 1, 2012
At its 1 November monetary policy meeting, the Czech National Bank (CNB) cut the two-week repurchase rate by 20 basis points to a record-low 0.05%, in a decision that surprised the market. The move follows on a 25 basis points cut at the previous meeting. At the current level, the two-week repurchase rate is 0.70 percentage points below the European Central Bank's main policy rate. In addition, the Bank lowered the Lombard rate, which is a ceiling for short-term interest rates, by 50 basis points to 0.25% and the discount rate by 5 basis points to 0.05%. Monetary officials stated that, although headline inflation will be slightly above the CNB's target in 2013 owing to tax increases, inflation will be on the lower half of the tolerance band over the monetary policy horizon. The Bank added that the economy is expected to contract this year as a result of a marked slowdown in both external demand and domestic demand. Monetary authorities explained that the risks to the outlook are balanced, but that high uncertainty prevails about the fiscal consolidation measures next year and their impact on the economy. As a result, the Bank maintained a highly dovish stance, stating that the rates will remain at this level over a longer horizon until inflation pressures increase significantly. As in the previous meeting, in the press conference following the interest rate decision, CNB Governor Miroslav Singer reiterated that the Bank may start using the exchange rate as part of its monetary policy in order to implement further monetary easing, as the Bank is now running out of conventional tools. However, Singer did not provide any information about the possible timing of such a decision. The next monetary policy meeting is scheduled for 19 December.
Author: Ricardo Aceves, Senior Economist