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Czech Republic Monetary Policy March 2023

Czech Republic: The Czech National Bank stands pat in March

At its 29 March 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: One of the board’s seven members voted to hike all three rates by 25 basis points.

The Bank decided to stand pat for the sixth consecutive meeting, reiterating that the current level of interest rates was already having a dampening effect on domestic demand pressures, the quantity of loans and the amount of money in circulation. Meanwhile, the Bank expects headline inflation to fall to single digits in H2 due to tight monetary conditions and easing cost pressures. 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 expansionary fiscal policy. On the other hand, a stronger-than-projected downturn in domestic demand is the key downside risk.

The Bank reiterated that it “will decide at the next meeting whether rates will remain unchanged or increase” depending on the evolution of wage bargaining, adding that it deems “market expectations regarding the timing of the first decrease in CNB rates to be premature”.

The next meeting is scheduled for 3 May.

Commenting on the release, economists at ING stated:

“We do not expect the board to decide on an additional rate hike, however, it is true that the monthly data for January indicates strong wage momentum, which may push the board to make further hawkish statements. On the other hand, March inflation should show the first significant fall in year-on-year terms and very little rise in month-on-month terms, which should reassure the CNB that inflation is indeed starting to fall.”

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