Czech Republic: Czech National Bank stays put, continues foreign exchange intervention
June 26, 2014
At its 26 June monetary policy meeting, the Czech National Bank (CNB) left the two-week repo rate unchanged at 0.05%, where it has been since November 2012. The Central Bank also reiterated its commitment to intervening in the foreign exchange market in order to keep the Czech koruna at around CZK 27.0 per EUR. Both decisions were on par with market expectations.
The Central Bank stated that growth in economic activity picked up pace notably in the first quarter, which was in line with the Bank’s expectations. The Bank also said that more recent economic data suggest that growth is maintaining momentum, particularly in construction and industrial production, which have improved noticeably. Monetary authorities thus recognized that, for the rest of this year, growth in domestic demand and developments in the labor market are in line with the positive trajectory the Bank expected. Regarding price developments, the Bank pointed out that inflation is gradually rising after having fallen markedly at the beginning of the year. The Bank underlined that the weakening of the exchange rate is passing through to inflation, which is in line with its expectations. In addition, the Bank pointed out that producer prices are slowly increasing, due to the effect of the weakening of the Czech koruna.
Finally, the CNB concluded that given that anti-inflationary risks to the overall economic outlook persist, it, “would not discontinue the use of the exchange rate as a monetary policy instrument before 2015 Q2, and it did not rule out a further shift of the exit from this regime.” The Bank added, however, that it, “would have to find a much more pronounced increase in anti-inflationary risks before moving the exchange rate commitment to a weaker level.”
Author: Ricardo Aceves, Senior Economist