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Czech Republic Monetary Policy December 2020

Czech Republic: CNB stands pat in December

At its 17 December meeting, the board of the Czech National Bank (CNB) unanimously decided to keep the two-week repo rate unchanged at 0.25%, in line with market expectations and marking the fourth consecutive hold. In addition, the CNB kept the Lombard and discount rates at 1.00% and 0.05%, respectively.

The evolution of both inflation and economic activity, as well as November’s macroeconomic forecast, were behind the Bank’s decision to hold its ground. Inflation came in at 2.7% in November, down from October’s 2.9%, and is expected to move towards the 2.0% target in the second half of 2021 and early 2022 due to a stronger koruna and moderating price pressures. Meanwhile, following a sizable rebound in Q3, activity is likely cooling considerably in Q4, weighed down by the reintroduction of restrictions at the outset of the quarter, and the Bank does not expect GDP to reach its pre-crisis level before the end of 2022, with downside risks stemming from the uncertain evolution of the pandemic and a potentially slow vaccine rollout.

Going forward, the Bank’s baseline scenario sees rates remaining stable in the short term before rising gradually in 2021 as the economy recovers. However, the CNB stressed that risks to the new forecasts remain substantial. A further escalation of the pandemic domestically and abroad represents the main downside risk, while additional fiscal stimulus to spur the recovery—currently being debated by parliament—would act in the opposite direction.

The next meeting is scheduled for 4 February.

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