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Czech Republic Monetary Policy November 2020

Czech Republic: CNB stands pat in November

At its 5 November 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 economic activity and inflation, coupled with the Bank’s new macroeconomic scenario, underpinned its decision to keep its monetary policy stance unchanged. Inflation came in at 3.2% in September from August’s 3.3%, and is projected to fall into the Bank’s 1.0%–3.0% tolerance range in late 2020 and early 2021, before moving towards its 2.0% target in the second half of next year thanks to a stronger koruna and moderating cost pressures. Meanwhile, although the economic contraction this year will be somewhat softer than previously expected—the Bank trimmed its GDP forecast for next year from 5.4% to 4.5%—conditions remain downbeat, mostly due to elevated new Covid-19 cases.

Going forward, the Bank’s baseline scenario sees rates remaining stable before rising gradually in 2021—at the earliest—on the back of an economic recovery. 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 would act in the opposite direction. Against this backdrop, interest rates could be maintained at their current low level for longer than assumed in the bank’s baseline scenario.

The next meeting is scheduled for 17 December.

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