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Czech Republic Monetary Policy June 2022

Czech Republic: The Czech National Bank continues its tightening cycle in June

At its 22 June meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 125 basis points, from 5.75% to 7.00%, marking the ninth consecutive hike and bringing the key rate to its highest level since 1999. In addition, the CNB increased the Lombard rate to 8.00% from 6.75% and the discount rate to 6.00% from 4.75%. However, the decision was not unanimous: Two of the seven members voted to stand pat.

The decision came amid stronger-than-expected growth and inflation reaching 16.0% in May. The war in Ukraine continued to exert upward pressure on energy, commodity and food prices, moving inflation further away from the Bank’s 1.0–3.0% tolerance range. The Bank expects headline inflation to be in double digits this year and to return close to the 2.0% target only in late 2023. The Bank, therefore, hiked rates again in an effort to ensure that inflation returns to the midpoint of its tolerance band in the longer run.

Looking ahead, the Bank stated that in forthcoming monetary policy meetings “future monetary policy steps will depend on incoming new information and future forecasts”. However, it highlighted that inflation risks are clearly skewed to the upside, including higher energy and commodity prices, de-anchored inflation expectations, a weaker koruna and a supportive fiscal stance. As a result, further rate hikes this year are likely.

Commenting on the Bank’s decision, Frantisek Taborsky, analyst at ING, stated:

“We assume that today’s rate hike was the last in the current hiking cycle and the pain threshold of the new board for any further rate hikes is high. On the other hand, we expect the approach to FX intervention to remain unchanged despite rising costs. In the longer term, we continue to believe that the market is still underestimating the CNB’s transformation to a dovish stance and that the first rate cut will come earlier than the middle of next year, as the market currently expects.”

The next meeting is scheduled for 4 Aug.

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