Czech National Bank Monetary Policy to Remain Accommodative

July 31, 2014

Extreme disinflation in the euro area forced Czech monetary policy to become progressively more accommodative during and since the Great Recession.  From a high of 3.75% prior to a first cut in August 2008, the two-week Czech repo rate was cut eight times to 0.75% by June 2010 and three more times between June 2012 and November 2012 to a “technically zero level” of 0.05%.  But the external environment required even more stimulus, so in November 2013, officials introduced a cap on koruna strength at 27 per euro as an additional policy tool.  The exchange rate dimension of policy was to remain in place until the summer of 2015, but following a new review of macroeconomic forecasts that resulted in 0.4-percentage point downward revisions to projected Czech CPI inflation in both 2014 and 2015, officials released a statement today that extends the cap’s use until the beginning of 2016.  By unanimous decision, the koruna strongest allowed level remains at 27 per euro, but the door was not shut on the possibility of devaluing that target somewhat further in the future.

The Bank Board assesses the risks to the new forecast as being slightly anti-inflationary. It considers longer-lasting very subdued inflation in the euro area to be the main risk.  The current exceptionally low inflation reflects the very subdued inflation in the euro area, a continuing decline in administered prices and slowing food price growth.  The Bank Board would have to find a further noticeable increase in anti-inflationary factors before moving the exchange rate commitment to a weaker level.

From 0.4% on average in 2014, officials aim to lift CPI inflation to near 2% by the second half of next year.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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