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Czech Republic Monetary Policy February 2023

Czech Republic: The Czech National Bank stands pat in February

At its 2 February 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 board’s seven members voted to hike all three rates by 50 basis points.

The Bank decided to stand pat for the fifth consecutive meeting, reiterating that the current level of interest rates was already having a dampening effect on domestic demand, the quantity of loans and the amount of money in circulation. Meanwhile, the Bank expects headline inflation to peak in the coming months and decline relatively quickly from spring onwards due to tight monetary conditions and easing cost pressures. It expects inflation to average 10.8% in 2023 and 2.1% in 2024, approaching the 2.0% target in the first half of next year. Moreover, the Bank reiterated that it would continue to prevent excessive fluctuations of the koruna to minimize imported inflation.

Looking ahead, the Bank sees both strong upside and downside inflationary risks. The main upside risks include faster-than-expected wage growth, unanchored inflation expectations and an expansionary fiscal policy. On the other hand, a stronger-than-projected downturn in domestic demand 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 government’s fiscal stance.

The next meeting is scheduled for 29 March.

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