Czech National Bank Takes Another Step Toward Interest Rate Normalization

September 26, 2018

In November 2012, Czech monetary policymakers enacted their final interest rate cut of the Great Recession cycle, lowering the 2-week repo rate to 0.05%, which they considered to be the lowest level such could safely go and therefore a virtual zero rate policy. A cap on koruna appreciation at 26 per euro was imposed a year later, and it wasn’t until May 2017 that the exchange rate ceiling imposed with automatic intervention got lifted. Three months later in August 2017, an initial 20-basis point increase of the 2-week repo to 0.25% began the road of interest rate normalization. Therein followed a series of 25-basis point rate hikes in November 2017, February 2018, June 2018, August 2018, and today September 2018. This was the first time tightening occurred at back-to-back policy reviews, but unlike the unanimous vote in August, today’s decision split 6-1, with a single dissent in favor of leaving rates unchanged.

In conjunction with the hiked 2-week repo, the central bank also raised its Lombard and discount rate to 2.5% and 0.50%, respectively.

Today’s statement projects that “inflation will be above the Czech National Bank’s 2% target for the rest of this year. It will return to the target at the monetary policy horizon and remain close to the target during 2020. Consistent with this outlook is a continued rise in interest rates towards their long-run neutral level.” Forecast risks are deemed “balanced and insignificant.” Key uncertainties are “the growth in protectionist measures in global trade and from Brexit-related events.” The statement is upbeat about Czech economic growth.

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



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