Skyline of Prague, Czech Republic

Czech Republic Monetary Policy March 2021

Czech Republic: CNB stands pat in March; suggests rates could remain at current low for longer than previously expected

At its 24 March 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 sixth consecutive hold. In addition, the CNB kept the Lombard and discount rates at 1.00% and 0.05%, respectively.

Substantial risks of the health crisis lasting longer than anticipated and continuing to affect the economy, and the subsequent need to sustain activity, were behind the Board’s decision to maintain an accommodative stance. Although activity continued to recover in Q4 2020 despite the reintroduction of Covid-19 containment measures, and the Bank now expects GDP to expand over 2.0% in 2021 and then accelerate further in 2022, downside risks stem from uncertainty over the course of the pandemic and progress in vaccination efforts. Meanwhile, inflation has been higher than the CNB’s expectations recently, mainly due to stronger food and core price pressures, although it should hover around the midpoint of the Bank’s 1.0%–3.0% tolerance range this year.

Going forward, the Bank’s baseline scenario sees rates remaining stable in the first half of this year and then rising from mid-2021 as the economy firms up. That said, the CNB stressed that risks to its current forecasts—stemming from prolonged lockdown measures due to recent developments on the Covid-19 front—remain substantial, which could require monetary conditions to remain accommodative for the full year.

Commenting on the release, analysts at ING stated:

“While the unfavourable pandemic situation in 1Q21 delays the start of the recovery, the recent signals from the CNB Board members suggest that rate hikes in the second half of this year remain on the table. We continue to expect two 25bp hikes in 4Q21. An earlier hike (in August) is still possible given the Governor’s comments, but only if the pandemic situation improves significantly in the second quarter, accompanied by a strong pace of vaccination.”

The next meeting is scheduled for 6 May.

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