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Czech Republic Monetary Policy June 2021

Czech Republic: CNB hikes rates in June amid mounting price pressures and a stronger-than-expected economy

At its 24 June meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate to 0.50% from 0.25%, after seven consecutive holds. In addition, the CNB increased the Lombard rate from 1.00% to 1.25%, but left the discount rate unchanged at 0.05%. The decision was not unanimous, but was supported by four out of the seven members, while one member voted in favor of a 50 basis-point hike and two voted to leave rates unchanged.

A softer-than-expected GDP contraction in the first quarter, despite tougher Covid-19 restrictions, and building price pressures in Q2 prompted the Bank to tighten its stance. The Bank expects the economy to expand in Q2, while it projects inflation to hover around the upper bound of its 1.0%–3.0% tolerance range in the quarters ahead, before moving closer to the 2.0% target next year.

Going forward, the Bank’s baseline scenario sees rates rising further in the second half of the year as the economy continues to strengthen. The CNB now sees inflationary risks to be skewed to the upside, stemming from a faster recovery in domestic demand and higher administered prices. As such, it stated that “with the present decision, monetary policy is probably entering a phase of gradual growth in interest rates”.

The next meeting is scheduled for 5 August.

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