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Czech Republic Monetary Policy August 2020

Czech Republic: CNB stays put again in August

At its 6 August meeting, the board of the Czech National Bank (CNB) unanimously decided to keep the two-week repo rate stable at 0.25%, coming in line with market expectations and marking the second consecutive hold. In addition, the CNB left the Lombard and discount rate unchanged at 1.00% and 0.05%, respectively.

The Bank’s decision was underpinned by its new macroeconomic forecast, which sees rates remaining stable until mid-2021 before rising gradually during H2 2021 as economic activity recovers. The new CNB forecasts point to an economic contraction of 8.0% this year, which is similar to the previous forecasts from May, but they are less optimistic on the rebound next year, seeing a softer 3.6% expansion compared to the 4.0% increase estimated previously. Meanwhile, the CNB expects inflation to average 3.4% this year, markedly above the 2.8% seen in the previous forecast. Although inflation is projected to remain above the 1.0%–3.0% tolerance range for the remainder of the year, mainly due to higher core and food inflation, the Bank foresees that the deep decline in economic activity will bring the inflation rate down to its 2.0% target by the end of next year.

Looking ahead, the communiqué highlighted that risks to the new forecasts remain elevated but not tilted in either direction. There is therefore still great uncertainty ahead, which particularly hinges on the speed of economic recovery in the EU and domestically. Against this backdrop, and considering the larger-than-expected rate cut delivered in May, staying pat is a possible scenario for the Bank going forward, although some panelists still see further easing.

Reflecting on the meeting, Jakub Seidler, chief economist at ING Czech Republic, noted:

“Today’s CNB decision was unanimous and the Board seems to be satisfied with the current monetary policy stance. As we stated earlier, we currently expect rates stability and their possible growth in the second half of next year. This is also the current CNB baseline scenario, however, the risks to these developments remain high, which was highlighted a few times during the press conference by Governor Rusnok.”

The next meeting is scheduled for 23 September.

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