Czech Monetary Policy Left Unchanged but Two Scenarios Worked Up

May 3, 2012

The Czech National Bank’s two-week repo rate remained at 0.75%, its level since a 25-basis point cut in May 2010 culminated 300 basis points of easing begun in August 2008.  Policy members were all over the map in a 4-2-1 verdict that included two votes for a 0.50% rate level and one vote for a 25-bp rate hike to 1.0%.

A statement presents a baseline forecast in which GDP growth is zero in 2012 followed by 1.6% in 2013, and monetary-relevant inflation hovers between 2% and 3% this year but falls to marginally below the 1-3% target midpoint in 2013.  Projected market interest rates drift lower in the near term but chart an upward course from the second half of 2013.

An alternative scenario, with more fiscal austerity, is also presented in which the trajectory of market interest rates lies below the baseline scenario.  Growth is again zero this year under this assumption and only 1.1% in 2013, while headline inflation is higher because of the effect of an increase in VAT.  The word “alternative” is misleading, since prospects look at least as strong for its fiscal assumption as for those underlying the baseline forecast.  One suspects that Czech monetary policy will be more accommodative in the alternative conditions than the baseline ones.  At least, the present key interest rate probably would be retained for longer.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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