CNB Meets, Interest Rates Remain Unchanged

Czech National Bank

The Czech National Bank (CNB) Board kept its interest rates unchanged at its meeting held on March 28 as expected. A hike in May, when the new forecast is to be presented, still remains a possibility if the data stabilizes and Czech crown remains weak.

The two-week repo rate remains at 1.75%, the discount rate at 0.75% and the Lombard rate at 2.75%.

According to the CNB Governor Jiri Rusnok, the reason for leaving rates unchanged was mainly development abroad, particularly of German and Slovak economies, and uncertain Brexit.

The bank moderated its view of pro-inflationary risks due to weaker CZK compared to the CNB assumptions and slowdown of the European growth, which brought more doubt on how much or even whether loans cost may grow further this year. The CNB forecast expects inflation to return to 2% target after a temporary increase in the 1H19. “Anti-inflationary risks stem from the global economy, weaker wages growth and households consumption in 4Q18,” said ING Chief Economist Jakub Seidler.

According to the CNB board member Tomas Holub, the bank is likely to hike its interest rates once or twice this year. “Overall, data from the domestic economy seems to me to be slightly supporting a further rise of interest rates. I see zero to two [hikes this year]. I don’t rule out the zero as such, but I don’t see it much likely. We are still in the process of normalising monetary policy,” Holub said.

Another CNB board member Vojtech Benda anticipates the bank could even raise its rates three times in 2019, due to weaker koruna. “If the crown were to remain near the current levels, it is likely to happen that there could be three rate hikes by the CNB this year,” Benda said.

Governor Rusnok confirmed these statements. “It may still happen that there is no or two interest rate increases this year. It will depend on what happens in the upcoming months,” Rusnok said, stressing that no hiking could happen should the global economy continue deteriorating.

“Given the recent dovish U-turn among many other global central banks, we read today’s CNB message as the May hike still being on the cards. We still look for the May hike, but admittedly, foreign data have improved between on and the May meeting,” said Seidler and ING Chief EMEA FX and IR Strategist Petr Krpata, adding that one argument for tightening in May will be the developments of Czech crows and as CZK will not likely appreciate as expected, this will be a clear reason to tighten from the perspective of CNB tightening trade-off between FX and rates.

The CNB Board hiked its main interest rate last time on n for the fifth time in 2018. The interest rate was increased by 0.25 percentage point to 1.75%, due to slowing domestic economic development, the growth of wages, weakening of koruna and because inflation is running above a 2% CNB´s target.