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Czech Republic Monetary Policy August 2023

Czech Republic: Czech National Bank stands pat in August; ends FX intervention regime

At its 3 August meeting, the Board of the Czech National Bank (CNB) left the two-week repo rate unchanged at 7.00%. In addition, the CNB left both the Lombard rate and the discount rate unchanged at 8.00% and 6.00%, respectively. Meanwhile, the Bank decided to put an end to the FX intervention regime activated in May 2022 as part of its monetary policy program.

The Bank decided to stand pat for the ninth consecutive meeting, reiterating that the current level of interest rates was already dampening domestic demand, the quantity of loans and the amount of money in circulation. Moreover, a new macroeconomic forecast—which implies a reduction in interest rates from Q3 2023 as its baseline scenario—also supported the Bank’s decision. Inflation fell to 9.7% in June from 11.1% in May, and the CNB expects it to return to levels close to the 2-4% inflation target in 2024. Overall, it sees inflation averaging 11.0% this year and 2.1% in 2024, while it expects GDP to rise by 0.1% in 2023 and 2.3% in 2024.

Looking ahead, the Bank sees significant upside inflationary risks, including a wage-price spiral, unanchored inflation expectations and expansionary fiscal policy. The evolution of the war in Ukraine and energy prices represent the main uncertainties.

The Bank stated that it would “base its decisions mainly on an assessment of newly available data and of the fulfillment of the forecast”, adding that “market expectations regarding the pace of the decrease in rates may not materialise”. It also said that it would prevent excessive exchange rate fluctuations that could endanger price stability.

Our panelists expect the Bank to start cutting rates before the end of this year, as inflation continues to downtrend.

The next meeting is scheduled for 27 September.

Commenting on the outlook, Frantisek Taborsky, analyst at ING, stated:

“Our view remains unchanged after today’s meeting. We expect the CNB to cut rates for the first time in November by 25bp and to continue slowly in the coming months. Today’s decision to lift the FX regime shows that the board is preparing the ground but does not want to rush the rate cut. We will see a few more inflation numbers and more details on the key January energy repricing before the November meeting, which should give the CNB confidence about inflation returning to target. However, there remains a risk that the CNB may want to wait for January inflation and stay on the safe side.”

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