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Czech Republic Monetary Policy May 2019

Czech Republic: CNB delivers first rate hike of 2019

On 2 May, the Bank Board of the Czech National Bank (CNB) unanimously decided to lift the two-week repo rate by 25 basis points to 2.00%, marking the first rate hike of the year. At the same time, the CNB increased both the Lombard rate and discount rate by 25 basis points to 3.00% and 1.00%, respectively.

The Board’s decision was underpinned by the change in its macroeconomic outlook, with its inflation projections raised compared to the February 2019 forecasts. The shift was in large part due to the recent acceleration in inflation, which reached an over six-year high of 3.0% in March, hitting the upper bound of the CNB’s 1.0%–3.0% tolerance band. The Bank expects that inflationary pressures will remain elevated in the coming months, owing largely to higher administered prices and food prices; however, they are seen gradually easing thereafter on slower wage growth and economic activity, with inflation coming back down to the 2.0% target in early-2020.

In terms of forward guidance, the Bank’s projections alluded to broad stability of rates in the coming year and hence a pause in the tightening cycle which started in mid-2017. That said, analysts contend that further tightening may be warranted if inflation remains stubbornly high or if a notable improvement in external conditions were to materialize, particularly in the Eurozone economy.

The next monetary policy meeting is scheduled for 26 June.

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