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Czech Republic Monetary Policy May 2021

Czech Republic: CNB stands pat in May amid a worsening growth outlook

At its 6 May 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 seventh consecutive hold. In addition, the CNB kept the Lombard and discount rates at 1.00% and 0.05%, respectively.

A downward revision of the growth outlook for the economy underpinned the Bank’s decision to maintain its accommodative stance. Lockdown measures associated with the health crisis affected activity in Q1, and will likely continue to constrain momentum in Q2. As such, the Bank now sees GDP growth at a modest 1.2% in 2021 (previous forecast: +2.2%) before it accelerates to 4.3% in 2022 (previous forecast: +3.8%), with the main downside risks stemming from uncertainty over the course of the pandemic and progress in vaccination efforts domestically and abroad. The decision came despite higher-than-expected inflation recently—mainly due to stronger energy price pressures—with the CNB projecting it to accelerate further in the months ahead. Next year, however, inflation should return close to the midpoint of the Bank’s 1.0%–3.0% tolerance range amid a tighter monetary policy stance and softer growth in import prices.

Going forward, the Bank’s baseline scenario sees rates remaining stable in the first half of this year and then rising in H2 as the economy firms up. The CNB now sees downside pandemic-related risks to its current forecasts as less substantial than at its March meeting, and it therefore dropped its reference to the possibility of monetary conditions remaining accommodative for the full year.

Commenting on the release, analysts at ING stated:

“Given the CNB communication today, we revise our call for the first CNB hikes from 4Q21 to the August meeting. A June hike cannot be ruled out, but we believe waiting for the new forecast might be preferred by the board. Given the change in timing and the new forecast, 3 hikes seem now likely (vs 2 expected earlier). The DNA of the CNB is hawkish and the bank signalled today it is closer to getting back to normal.”

The next meeting is scheduled for 23 June.

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