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Czech Republic Monetary Policy February 2022

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

At its 3 February meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 75 basis points to 4.50%, marking the sixth consecutive hike and surprising markets on the upside. In addition, the CNB increased the Lombard rate to 5.50% from 4.75% and the discount rate to 3.50% from 2.75%. However, the decision was not unanimous: Five out of the seven members were in favor, but two voted to stand pat.

The decision to hike rates came amid soaring inflationary pressures. Inflation reached 6.6% in December, moving further above the upper bound of the Bank’s 1.0%–3.0% tolerance range. Moreover, the economy performed better than forecasted in Q4, giving the Bank further room to tighten its stance. Looking to 2022, the Bank expects inflation to exceed 9.0% at the start of this year amid strong domestic demand, elevated energy prices, and higher personnel and material costs, before declining afterwards towards the 2.0% target in the first half of 2023.

Looking ahead, the Bank plans to substantially raise rates in H1 of this year in a bid to anchor inflation expectations and curb second-round effects, and then to gradually decrease them in H2. The CNB sees both upside and downside risks to inflation, the former stemming mainly from a slower-than-expected appreciation of the koruna, and the latter from more modest household spending growth and potential fiscal consolidation. Therefore, the Bank changed the tone of its communiqué, dropping its reference to, “continue increasing interest rates […] in order to maintain price stability”, and substituting it for, “future monetary policy steps will depend on incoming new information and future forecasts”.

The next meeting is scheduled for 31 March.

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