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Czech Republic Monetary Policy August 2022

Czech Republic: The Czech National Bank stands pat in August

At its 4 August meeting, the Board of the Czech National Bank (CNB) left the two-week repo rate unchanged at 7.00%, following nine consecutive hikes. In addition, the CNB left the Lombard rate unchanged at 8.00% and the discount rate at 6.00%. However, the decision was not unanimous: Two of the seven members voted to hike rates by 100 basis points.

The Bank decided to stand pat as it considered that previous rate hikes were already dampening domestic demand. Meanwhile, the Bank expects headline inflation to peak in the coming few months, mainly due to increasing gas and electricity prices. It revised forecasts for inflation in 2022 up from 13.1% to 16.5%, and for 2023 to 9.5% from 4.1%.

Looking ahead, the Bank sees both strong upside and downside risks. Higher commodity prices, de-anchored inflation expectations and a wage-price spiral pose the main upside risks. Meanwhile, the increasing likelihood of a global recession and a stronger-than-forecast downturn in domestic demand represent the key downside risks. The Bank therefore stated that it stands “ready to react appropriately to any materialisation of the risks of the forecast”.

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

“Today’s CNB meeting confirmed the transformation from hawk to dove and, in our view, showed that the new board is not willing to hike rates now or in the future. Thus, we see no change in our forecast and continue to expect the CNB to no longer raise rates. Although the governor mentioned during the press conference that further rate hikes are not out of the question and will depend on incoming data from the economy, we believe that global developments and pressure on the koruna are key at the moment.”

The next meeting is scheduled for 29 September.

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