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Czech Republic Monetary Policy September 2019

Czech Republic: CNB stays put again in September

On 25 September, the board of the Czech National Bank (CNB) decided to keep the two-week repo rate unchanged at 2.00%, marking the third consecutive hold and coming in line with market expectations. Notably, however, the decision was not unanimous, with two of the seven members voting to hike the repo rate to 2.25%. The CNB left both the Lombard and discount rates unchanged at 3.00% and 1.00%, respectively.

Above-target inflation drove the Bank’s prudent decision, as well as the debate to possibly raise rates against a backdrop of easing in the world’s leading central banks. Inflation has lingered above the 2.0% goal, although remained within the tolerance range in recent months. The CNB commented in the accompanying statement that higher core inflation has caused price pressures to be slightly greater than expected in the third quarter so far, but that it expects inflation to fall at the start of next year. For now, the Bank decided to hold fire as the balance of risks remains still overall broadly balanced and only slightly inflationary, while the economic environment remains highly uncertain. Weak producer price inflation in the Eurozone are seen balancing the effects of a weaker koruna, and the risk of a pronounced slowdown of the economy due to weak external demand looms large.

Looking ahead, the Bank’s forward guidance was hawkish amid diverging views among members to hike or hold rates. The Bank stated that “the Bank Board expects to return to this debate at the next monetary meeting, when a new forecast will be available”, suggesting that a hike is not off the table. Moreover, in the accompanying press conference, Governor Jiri Rusnok commented that he did not see a reason to trim rates ahead.

Commenting on the direction of monetary policy, Jakub Seidler, chief economist at ING, noted:

“We believe that the current CNB August forecast seeing almost 3% GDP growth next year is relatively optimistic in the context of current external developments. The CNB’s November forecast should thus bring a downward revision reflecting current weakness in Germany/the Eurozone. As such, it is most likely that the more cautious policy stance will prevail again and rates will remain on hold.” 

The next monetary policy meeting is scheduled for 7 November.

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