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Czech Republic Monetary Policy June 2019

Czech Republic: CNB holds rates unchanged and points to pause in tightening cycle in June

On 26 June, the Bank Board of the Czech National Bank (CNB) decided to keep the two-week repo rate at 2.00%, after hiking it at the previous meeting. The decision was in line with market expectations. Accordingly, the CNB decided to hold both the Lombard rate and discount rate unchanged at 3.00% and 1.00%, respectively. Six board members voted for unchanged rates, while one member voted to hike rates by 25 basis points.

The decision reflected the Bank’s assessment that last meeting’s rate hike should be sufficient to rein in price pressures. In the accompanying statement, the Bank noted that inflation is expected to fall to the 2.0% target in early 2020 after lingering in the upper half of the CNB’s 1.0%–3.0% tolerance band this year. Solid domestic demand along with rising food and fuel prices have pushed up price pressures in recent months, although this should be temporary.

Looking ahead, the Bank pointed to a hold in the interest rate cycle, stating that “broad interest rate stability until mid-2020 is consistent with the forecast.” The statement follows the ECB’s recent postponement of a possible rate hike, stating at its June meeting that it will keep rates at current levels until “at least through the first half of 2020”, which has opened up space for the CNB to keep rates on hold. Regarding risks, the CNB said that risks are balanced and mainly related to external factors, such as rising global protectionism and a protracted slowdown in the Euro area.

The next monetary policy meeting is scheduled for 1 August.

Looking ahead, our panelists see the CNB on hold through the end of 2019. The research team at Goldman Sachs, for example, explained:

“As a result of increased ECB and Fed dovishness, we have pushed out our rate forecasts for CEEMEA low yielders, including the Czech Republic. We now expect the next hike in mid-2021. While we thus expect rates on hold for more than a year, we continue to expect that the next move will go up rather than down.”

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