Czech Republic Monetary Policy February 2021

Czech Republic

Czech Republic: CNB stands pat in February; hints at rate hike later this year

February 5, 2021

At its 4 February 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 fifth consecutive hold. In addition, the CNB kept the Lombard and discount rates at 1.00% and 0.05%, respectively.

A slowdown in both inflation and economic activity, as well as the Bank’s updated macroeconomic forecast, were behind the Board’s decision to maintain an accommodative stance. Inflation dropped to within the Bank’s 1.0%–3.0% tolerance range at the end of last year and is expected to fall closer to the 2.0% target in the first quarter of 2021. It will then fluctuate around that target afterwards as a stronger koruna offsets fading disinflationary effects from the pandemic. Meanwhile, activity cooled notably in Q4, weighed down by the reintroduction of Covid-19 containment measures, and the Bank now expects GDP to expand 2.2% in 2021 and 3.8% in 2022, with downside risks stemming from renewed restrictions and a slow vaccine rollout.

Going forward, the Bank’s baseline scenario sees rates remaining stable in the first half of this year and then rising by mid-2021 as the economy firms up. That said, the CNB stressed that risks to the new forecasts stemming from a longer-than-expected health crisis remain substantial.

The next meeting is scheduled for 24 March.

FocusEconomics analysts see the two-week repo rate ending 2021 at 0.31% and 2022 at 0.69%.

Author: Massimo Bassetti, Senior Economist

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