Czech Republic: CNB delivers larger-than-anticipated rate cut in May
At its meeting on 7 May, the board of the Czech National Bank (CNB) decided to slash the two-week repo rate by a larger-than-expected 75 basis points to 0.25%, marking the third consecutive cut in less than two months. The decision was not unanimous, however, as two out of the seven-member board voted for a smaller 50 basis-points cut. In addition, the CNB cut the Lombard rate to 1.00%, retained the discount rate at 0.05%, and announced new liquidity-injection measures.
The Bank’s decision was underpinned by its new macroeconomic forecast, which foresees economic activity contracting 8.0% this year due to the Covid-19 outbreak and the quarantine measures put in place to contain its spread. On the inflation front, the Bank assessed that it will return to the upper bound of its 1.0%–3.0% tolerance band in the coming months and decline to its 2.0% goal by the end of the year as softer price pressures due to the coronavirus crisis will outweigh temporary inflationary effects from a weaker currency. The regulator also announced it will provide loans to some non-bank entities and will broaden the type of collateral used by credit institutions to include mortgage bonds to tap into liquidity facilities. Notably, the Bank stated that it did not yet see a need to intervene in financial markets by injecting liquidity into financial institutions, after Parliament granted it asset-buying powers in April.
Looking ahead, the CNB stressed that it still has tools at its disposal were rates to hit the zero-lower bound, hinting that further monetary easing is still on the table if the economic scenario continues to deteriorate.
Commenting on the policy outlook ahead, Jakub Seidler, chief economist at ING Czech Republic, noted:
“All in all, today’s CNB decision to frontload rates lower beyond the forecast recommendation provides some chance that rates will remain stable for some time, at least in June, if economic developments will not disappoint the CNB forecast. Still, getting to a technical zero level in the second half of the year looks as a likely scenario now. However, the CNB probably hopes to weather the situation by keeping rates low for a longer period accompanied by a relatively weak koruna also delivering solid monetary easing”.