Another Tightening of Czech Monetary Policy

November 1, 2018

By a vote of 5-1 with one dissent in favor of unchanged policy, the Czech National Bank Board authorized a further 25-basis point increase in the benchmark two-week repo rate to 1.75% and in the Lombard and discount rates that flank it. This was the sixth hike of the repo rate since rate normalization began in August 2017 from a low of 0.05%. Officials expect Czech inflation to converge on the 2% target from the north sometime late in 2019 or early 2020 and to hover around the target thereafter. Growth has slowed but remains above 3.0%, and koruna softness, which has lifted imported inflation, is expected to reverse partly next year. In a statement of explanation, official spell out how their thinking has evolved lately.

The rate increase at the close of this year is mainly a response to depreciation of the koruna, which leads to a renewed inflationary effect of import prices. Pronounced inflation pressures from the domestic economy act in the same direction. The subsequent broad stability of rates during next year is a result of the forecasted appreciation of the koruna amid continuing very easy monetary policy in the euro area. A tightening of policy by the European Central Bank will then create room for further gradual growth in domestic rates in 2020.

The overall story of the forecast is essentially unchanged. The biggest change from the previous forecast is later renewal of the appreciation of the koruna. Coupled with higher foreign producer price inflation, it leads to higher import price inflation and subsequently also higher headline inflation. The headline inflation forecast has therefore shifted slightly upwards at the monetary policy horizon. Together with other factors, the weaker koruna leads to a higher interest rate path next year. The prediction for domestic economic growth is virtually unchanged. The Bank Board assessed the risks to the forecast at the monetary policy horizon as being slightly inflationary.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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