Czech National Bank

Petr Dubinsky

CNB Holds Rates, Signals Long Term Stability


The Czech National Bank held interest rates on Thursday and signaled they would stay unchanged in coming quarters, as robust momentum in the domestic economy offsets the impact of monetary easing abroad.


The bank has paused a two-year tightening cycle and, as it edged up its forecasts for economic growth, Governor Jiri Rusnok said its next rate move could be either up or down, with both eventualities equally balanced.


But in coming quarters rates were likely to stay unchanged, he added.


All 13 analysts in a Reuters poll expected the bank to leave its two-week repo rate at 2.00pc, and most see steady rates throughout 2019 and 2020. All rate setters backed Thursday’s policy decision.


Markets, via forward rate agreements (FRAs), however see chances of a rate cut this year and have fully priced in two within a year.


The bank’s new staff forecasts pegged growth at 2.6pc in 2019 and 2.9pc next year. Both estimates are 0.1 percentage points higher than previous ones and the bank also edged up its prediction for inflation, which it now expects to drop to 2.1pc rather than 2.0pc by the fourth quarter of 2020.


The outlook, the bank said, was consistent with a modest rise in domestic market interest rates – proxy for policy rates – now, followed by a decline next year.


Rusnok, though, said the board had agreed a hike was not needed. “The opinion prevailed that it is not necessary to react in any activist way to fluctuations (in the outlook),” Rusnok said.


“The board rather chose the tactic of leveling out the interest rate curve… because we judged the risk of a slight overshooting of the (inflation) target was relatively small.”


Rate setters have hiked rates eight times since 2017, the last time in May, as they seek to rein in inflation that has been above a 2pc midpoint of the bank’s target range for much of the past two years in an economy still on solid ground with record-low unemployment and fast-rising wages.


Major global central banks including the US Federal Reserve and European Central Bank have meanwhile started to cut rates or flagged looser policy as the broader global economic outlook deteriorates.


The Czech central bank is also keeping a close eye on the exchange rate, The crown has under performed the central bank’s assumptions in the past and could still be a reason to hike rates down the road.


The bank’s new forecast expects the crown to average 25.50 to the euro in 2019 and 24.9 in 2020, a slower pace of appreciation than previous outlooks. On Thursday it traded near an eight-week low around 25.750.


Via Reuters