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Czech Republic Monetary Policy June 2023

Czech Republic: The Czech National Bank stands pat in June; maintains hawkish tone

At its 21 June 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 25 basis points.

The Bank decided to stand pat for the eighth 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. Moreover, the Bank once more stated that it would continue to prevent excessive fluctuations of the koruna to minimize imported inflation. Meanwhile, inflation has declined faster than projected in the Bank’s baseline scenario, falling to 11.1% in May from 12.7% in April, and the CNB expects it to reach single digits “soon”.

Looking ahead, the Bank sees both significant upside and downside inflationary risks. The main upside risks include a wage-price spiral, unanchored inflation expectations and expansionary fiscal policy, while a stronger-than-projected downturn in domestic demand is the key downside risk.

The Bank reiterated that it “will decide at its next meeting whether rates will remain unchanged or increase” depending on “an assessment of the new CNB forecast and of newly available data”, adding that it considers “market expectations regarding the timing of the first decrease in rates to be premature”.

The next meeting is scheduled for 3 August.

Commenting on the outlook, Jiri Polansky, analyst at Erste:

“In our opinion, the current anti-inflationary data together with the expected inflation at the beginning of next year close to the inflation target imply the possibility of starting to cut rates as early as the third quarter. However, the current preference of the Bank Board implies a later start of the cutting cycle. In this respect, the CNB could wait a little longer to be sure that inflation is under control.”

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