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Czech Republic Monetary Policy November 2019

Czech Republic: CNB remains on hold in November

On 7 November, the board of the Czech National Bank (CNB) decided to hold the two-week repo rate stable at 2.00%, marking the fourth consecutive hold and coming in line with market expectations. The decision, however, was not unanimous, as two of the seven members—as in the last September meeting—voted to hike the repo rate to 2.25%. In addition, the CNB left both the Lombard and discount rates unchanged at 3.00% and 1.00%, respectively.

Although inflation has run above the Bank’s target recently, a more subdued external environment was the main factor driving the Bank’s prudent decision. Those who advocated for a rate hike stressed the inflationary pressures stemming from the overly tight labor market, while those arguing for rate stability highlighted how the slowdown abroad is already weighing on activity domestically, with firms cutting production and reporting declines in orders. Much of the meeting’s debate was focused on the Bank’s new quarterly outlook, which lowered next year’s growth forecast, raised the inflation projection and penciled in a weaker koruna. Specifically, on the price front, the Bank assessed that inflation will remain in the upper half of its 1.0%–3.0% tolerance band in the coming quarters but will subside on slowing wage growth and higher labor productivity, gradually converging to the 2.0% target by early 2021.

Looking ahead, despite the lower projections for growth, the Bank’s new forecast envisions further rate hikes this quarter and next to stave off domestic inflationary pressures. And although the Bank’s forward guidance also remained hawkish amid the dissenting votes which called for further policy tightening, the accompanying press conference hinted that future policy direction will largely hinge on the evolution of developments abroad.

The next monetary policy meeting is scheduled for 19 December.

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