Czech Republic Monetary Policy September 2021

Czech Republic

Czech Republic: CNB delivers stronger-than-expected hike in September

October 3, 2021

At its 30 September meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 75 basis points to 1.50%, marking the third consecutive hike and surprising markets on the upside. In addition, the CNB increased the Lombard rate from 1.75% to 2.50% and the discount rate from 0.05% to 0.50%. However, the decision was not unanimous: Five out of the seven members were in favor, but two voted to stand pat.

The decision to hike rates again largely came amid mounting inflationary pressures. The Bank sees inflation staying well above the upper bound of its 1.0%–3.0% tolerance range in the coming quarters, chiefly due to persistent global supply shortages, elevated food and fuel prices, and strong global demand for industrial products. The Bank’s tighter monetary stance should lead inflation back towards the 2.0% target rate in 2022.

Looking ahead, the Bank’s baseline scenario projects further tightening ahead amid recovering activity, an overheating labor market and rising housing costs. Moreover, the CNB sees inflationary risks skewed to the upside overall, largely stemming from longer-lasting disruptions in global supply chains, a de-anchoring of inflation expectations and higher-than-expected domestic inflation.

Jiri Polansky, analyst at Erste Bank, stresses that the monetary policy outlook is tied to the development of the koruna:

“The koruna has become an important factor in the development of rates, in our view. […] If the koruna remains weak in the coming quarters, the CNB will probably go up faster. If, on the other hand, the situation calms down, the koruna may strengthen very quickly towards the level of EUR/CZK 25, and the CNB would thus probably slow down in the pace of monetary policy tightening.”

The next meeting is scheduled for 4 November.

FocusEconomics analysts are still assessing the latest decision and new forecasts will be released on 5 October.

Author: Massimo Bassetti, Senior Economist

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Czech Republic Monetary Policy Chart

Czech Republic Monetary Policy October 2021

Note: 2-week repo rate in %.
Source: Czech National Bank (CNB).

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