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Czech Republic Monetary Policy February 2020

Czech Republic: Defying expectations, CNB hikes rates in February

At its first meeting of the year on 6 February, the board of the Czech National Bank (CNB) decided to lift the two-week repo rate by 25 basis points to 2.25%, marking the first hike since May 2019 and taking market analysts by surprise as the CNB was expected to stay put. The decision was made with a narrow majority as four of the seven members—two more than in the previous December meeting—voted in favor of tightening. In addition, the CNB raised both the Lombard and discount rates by 25 basis points to 3.25% and 1.25%, respectively.

Concerns over increased inflationary pressures led the CNB’s decision, despite slowing domestic activity. Inflation has hovered close to the upper bound of the 1.0%–3.0% tolerance band over the past year and rose further above it in December to 3.2% (November: 3.1%), marking an over five-year high. Against this backdrop, the CNB revised up its inflation forecast: In the coming months, the Bank sees it trending higher, partly due to government measures boosting household spending, before subsiding back to the 2.0% target during the first half of 2021 amid moderating wage growth.

Looking ahead, the CNB struck a relatively neutral tone in its communiqué, citing that the balance of risks to the inflation outlook were balanced. Meanwhile, it retained the exchange rate trajectory broadly similar to its previous forecast and assessed it to be anti-inflationary. Additionally, although the CNB’s interest rate path alludes to a cut towards year-end, this would likely depend on how external developments fare out, as highlighted by economists at ING Czech Republic:

“The [interest rate path] still shows cuts in 2H20 – we still think this is premature for the time being. If the developments abroad would indeed further significantly worsen, it is possible to imagine a renewed minor rate cut at the end of the year, but the stability of rates is more likely, in our view.”

The next monetary policy meeting is scheduled for 26 March.

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