Czech National Bank

February 4, 2016

Following the central bank Board’s latest meeting, officials released a statement retaining existing policy settings, which was the result that markets anticipated.  The two-week repo rate has been at 0.05% since November 2012, and an asymmetric exchange rate policy that uses intervention to prevent the koruna from appreciating beyond 27 per euro was introduced in November 2013.  The statement says the exchange rate will be a tool of monetary policy all this year but probably be lifted in that role sometime during the first half of 2017.  The statement also notes that the “Bank Board again also discussed the possibility of introducing negative interest rates in light of the widening of the interest rate differential vis-à-vis the euro area and developments in domestic financial markets.”  Officials unveiled new growth and inflation forecasts.  Real GDP is now projected to expand 2.7% in 2016 and 3.0% in 2017, down from 4.7% in 2015.  Consumer prices rose 0.8% in the latest 12 months.  The bank is assuming that monetary policy relevant inflation will climb to 1.8% by the first quarter of 2017.  In discussing its latest thinking about growth and prices, officials had this to say:

Compared to the previous forecast, the predictions for headline and monetary policy-relevant inflation are lower for the next few quarters owing to the lower inflation observed at the end of the year, a more subdued outlook for foreign producer prices and a further drop in oil prices. The decrease in the predictions is less marked at the monetary policy horizon – i.e. in the first half of 2017 – as the direct effect of the oil price decrease will fade and stronger growth in domestic nominal wages will foster higher inflation. The revision of GDP growth compared to the previous forecast is negligible. The assumption of flat market interest rates at their current very low level and the use of the exchange rate as a monetary policy instrument until the end of 2016 remains unchanged in the forecast. After the exit from the exchange rate commitment, the path of market interest rates is lower in 2017, primarily as a result of the extension of quantitative easing by the European Central Bank.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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