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Czech Republic Monetary Policy December 2022

Czech Republic: The Czech National Bank stands pat in December

At its 21 December meeting, the Board of the Czech National Bank (CNB) left the two-week repo rate unchanged at 7.00%. In addition, the CNB left both the Lombard rate and the discount rate unchanged, at 8.00% and 6.00%, respectively. However, the decision was not unanimous: Two of the boards seven members voted to hike all three rates by 50 basis points.

The Bank decided to stand pat for the fourth consecutive meeting, reiterating that the current level of interest rates was already having a dampening effect on domestic demand and the quantity of money in circulation. Meanwhile, the Bank expects headline inflation to peak in the coming months and reach around 20.0% in early 2023, mainly due to increases in gas and electricity prices. It sees inflation averaging 15.8% in 2022 and returning to the 2.0% target within one year and a half.

Looking ahead, the Bank sees both strong upside and downside inflationary risks. The main upside risks include faster-than-expected wage growth, a more expansionary fiscal policy and de-anchored inflation expectations. On the other hand, the increasing likelihood of recessions in both the Czech Republic and globally, and a faster-than-expected decline in core inflation represent the key downside risks.

The Bank stated that it “will decide at the next meeting whether rates will remain unchanged or increase” depending on the evolution of wage bargaining and the governments fiscal stance, adding that “the markets expectation that we will not increase rates in the first half of next year may not materialise”.

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

“From our perspective, nothing much has changed in the picture after today’s meeting. The board has been trying to maintain hawkish expectations for longer, but the market instead is more focused on the global picture. […] The January re-pricing will be decisive and may surprise massively to the upside. However, in the base case scenario, we expect numbers close to 18% YoY. This should be enough for the CNB to maintain its current rhetoric and not have to do anything.”

The next meeting is scheduled for 2 February.

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