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Czech Republic Monetary Policy December 2019

Czech Republic: CNB stays put in December

On 18 December, the board of the Czech National Bank (CNB) decided to keep the two-week repo rate steady at 2.00%, marking the fifth consecutive hold and coming broadly in line with market expectations. The decision, however, was not unanimous, as two of the seven members—as in the last November meeting—voted to hike the repo rate to 2.25%. In addition, the CNB left both the Lombard and discount rates unchanged at 3.00% and 1.00%, respectively.

As in the previous meeting, those members who voted for a rate hike highlighted the increased inflationary pressures seen recently, with inflation hovering close to the upper bound of the 1.0%–3.0% tolerance band and overshooting it in November. That said, the economic backdrop at home was the dominant factor for prompting the Bank to stay put. Although the economy continues to fare well, it has started to show some signs of weakness. Growth came in lower than expected in Q3, weighed on by waning household consumption and subdued industrial production. And despite the Bank recognizing that external risks have diminished somewhat recently, which drove its decision to remain on hold in last meeting, uncertainty surrounding the domestic economy underpinned the Bank’s prudent decision this time around.

Looking ahead, the dissenting votes which called for further policy tightening renders the Bank’s forward guidance as slightly hawkish. However, in the press conference, policymakers hinted at a wait-and-see approach going forward, assessing incoming data before making a decision. In particular, it would have to strike a delicate balance between increased inflationary pressures and slowing domestic activity with lingering foreign risks.

Commenting on the CNB’s policy direction ahead, economists at ING Czech Republic noted:

“All in all, today’s press conference supports our view that if the situation abroad improves slightly (as the market now believes after the US-China trade deal) and domestic economic activity won’t deteriorate further, a rate hike next year is becoming a quite likely scenario (though it is not a done deal yet as it will depend on how new data both from abroad and domestically will evolve).”

The next monetary policy meeting is scheduled for 6 February.

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