Czech National Bank

May 5, 2016

The two-week repo rate has been at 0.05%, which Czech monetary officials consider “technical zero” since November 2012, and officials have had a policy of automatic and unlimited intervention since November 2013 to enforce an asymmetric foreign exchange rate policy to prevent appreciation in the koruna beyond CZK 27 per euro.  These settings were reaffirmed at the latest central bank board meeting, which also revised down the projected inflation path, lowered expected GDP growth in 2016 to 2.3% from 2.7% but raised estimated growth next year slightly.  The latest thinking of monetary officials was clarified in a released statement:

The Bank Board assessed the risks to the forecast at the monetary policy horizon as being slightly anti-inflationary. Producer price inflation in the euro area is a significant risk. It may be more subdued than currently assumed, as has been the case several times in the recent past. In addition, the risk of undesirable second-round effects of foreign cost factors is rising as the duration of the period of very low inflation increases, although those factors primarily represent favourable supply shocks. The central bank reacts to any adverse second-round effects of such cost factors, unlike to their immediate price effects. In this context, the Bank Board points out that the CNB stands ready to shift the exchange rate commitment to a weaker level if there were to be a systematic decrease in inflation expectations manifesting itself in nominal variables, especially wages. At the same time, the Bank Board states again that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. The Bank Board considers it likely that the commitment will be discontinued in mid-2017, i.e. in line with the assumption of the new forecast. At the same time, the Bank Board again discussed the possibility of using negative interest rates.

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


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