Czech Republic: CNB cuts rates for second time in less than two weeks in March
March 26, 2020
At its meeting on 26 March, the board of the Czech National Bank (CNB) unanimously decided to slash the two-week repo rate by 75 basis points to 1.00%, which follows the 50 basis points cut already delivered at the extraordinary meeting held on 16 March. In addition, the CNB cut both the Lombard and discount rates to 2.00% and 0.05%, respectively; and relaxed banks’ countercyclical capital buffers.
The rapidly deteriorating economic scenario caused by the spreading Covid-19 pandemic prompted the CNB to axe rates for the second time in less than two weeks. The Bank noted that the fall in external demand and measures adopted by the government to counter the spread of the coronavirus will drastically hit domestic activity—which it now sees the economy tipping into recession this year—and lead to a decline in inflation. The Bank thus cut rates to cushion the economy from the shock. Moreover, the CNB assessed that contracting economic activity will likely have an adverse effect on banks’ loan portfolios. Consequently, the regulator lowered the countercyclical capital buffer rate from 1.75% to 1.00%, effective 1 April, to support further bank lending into the real economy.
Looking ahead, the CNB stressed that it remained ready to further lower rates if necessary; to fully scrap countercyclical capital buffers were banks’ losses to rise unexpectedly; and to intervene in the FX market if excessive fluctuations of the exchange rate warrant it, in line with the country’s managed float system. It also noted it would adopt further policy measures and even hold extraordinary meetings if needed.
Author: Javier Colato, Economist