Czech Republic: The Czech National Bank stands pat in May; strikes more hawkish tone
At its 3 May meeting, the Board of the Czech National Bank (CNB) left the two-week repo rate unchanged at 7.00%. In addition, the CNB left both the Lombard rate and the discount rate unchanged at 8.00% and 6.00%, respectively. However, the decision was not unanimous: Three of the board’s seven members voted to hike all three rates by 25 basis points.
The Bank decided to stand pat for the seventh consecutive meeting, reiterating that the current level of interest rates was already having a dampening effect on domestic demand pressures, the quantity of loans and the amount of money in circulation. Moreover, the Bank stated that it would continue to prevent excessive fluctuations of the koruna to minimize imported inflation. Meanwhile, the Bank released new inflation and GDP growth forecasts. It expects headline inflation to fall to single digits in H2 due to tight monetary conditions and easing cost pressures, while it sees inflation averaging 11.2% this year and 2.1% in 2024 (previous forecasts: 10.8% in 2023 and 2.1% in 2024). In terms of growth, the CNB projects the economy to expand 0.5% in 2023 and 3.0% in 2024 (previous forecasts: -0.3% in 2023 and +2.2% in 2024).
Looking ahead, the Bank sees both strong upside and downside inflationary risks. The main upside risks include a wage-price spiral, unanchored inflation expectations and expansionary fiscal policy. On the other hand, a stronger-than-projected downturn in domestic demand is the key downside risk.
The Bank reiterated that it “will decide at its next meeting whether rates will remain unchanged or increase” depending on the evolution of wage bargaining, adding that “market expectations that rates have peaked may not materialize”.
The next meeting is scheduled for 21 June.
Commenting on the release, Vojtech Benda and Frantisek Taborsky, analysts at ING stated:
“We assume the CNB will keep rates unchanged until August. A swift decline of core inflation can play a crucial role in the decision to cut interest rates in the summer. In our view, it is unlikely that a majority of the CNB board will vote for a rate hike. On the contrary, rate cuts are out of question until August, when the new summer forecast will be published and discussed.”