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Czech Republic Monetary Policy February 2024

Czech Republic: Czech National Bank doubles down on monetary easing in February

At its 8 February meeting, the Board of the Czech National Bank (CNB) cut the 2-week repo rate to 6.25% from 6.75%, following a 25 basis point cut at its previous meeting in December. In addition, the CNB reduced both the Lombard rate and the discount rate by 50 basis points to 7.25% and 5.25%, respectively. Six out of the seven board members voted to reduce rates by 50 basis points, while one voted to deliver a more aggressive 75 basis point cut.

The Bank decided to intensify the pace of monetary easing amid a pronounced moderation in price pressures; it expects inflation to have dropped to around 3.0% in January. That said, it stated that the pace of easing must be gradual due to upside inflationary risks stemming from elevated inflation expectations and an acceleration in money creation due to increased lending in the real estate market. Meanwhile, the Bank expects inflation to average 2.6% in 2024 and 2.0% in 2025.

Looking ahead, the Bank said that it would base future decisions on the persistence of the disinflationary trend, the economic impact of fiscal policy, the performance of the labor market and the evolution of domestic and external demand. It also reiterated that “the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive if inflation does not decrease in line with the forecast”. Our panelists expect the CNB to cut rates further by year-end due to declining price pressures.

The Bank’s next meeting will be on 20 March.

Commenting on the Bank’s decision, Erste Bank’s Jiri Polansky stated:

“By cutting rates more significantly, the CNB is probably not worried about inflation in the coming months and is instead placing more emphasis on the development of the real economy. The CNB is likely to cut rates at its next meetings as well. For the end of this year, we expect the CNB’s main rate at 4%; the market is now even more optimistic (3.50%).”

Meanwhile, ING’s Frantisek Taborsky commented:

“For now, we leave our forecast unchanged with 50bp cuts for the next meetings with the rate at 4% at year-end. If inflation surprises significantly to the downside, below 2.5%, and EUR/CZK returns below 25.00—which is our forecast—we may see a chance for an acceleration later but not for the upcoming meetings.”

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