The Czech Republic’s central bank returned to its path of tightening monetary policy after a five month pause, raising its benchmark rate by 25 basis points to 2.0 percent and forecast the koruna’s exchange rate would strengthen and domestic interest rates would rise before stabilizing until the middle of 2020.
It is the first interest rate hike by the Czech National Bank (CNB) this year after a break following a hike in November 2018 and its 8th rate increase since August 2017 when it began tightening its monetary policy in the face of strong growth that was pushing up inflation.
The CNB’s latest forecast sees slowing inflation this year and stabilization around the 2.0 percent target in 2020 and lower economic growth due to a deterioration in the global economy against the backdrop of the risks of longer-lasting slowdown in the euro area and trade protectionism.
While the CNB’s rate hike was widely expected due to an acceleration in inflation, it’s hawkish stance is in stark contrasts with a more dovish monetary policy stance in most of the world, and especially in Europe where the European Central Bank pushed back any tightening until next year.
The CNB expects growth in the effective euro area, a measure based on those countries that import goods from the Czech Republic, to slow to 1.2 percent this year, down from its previous forecast of 1.5 percent, before rising to 1.6 percent next year, down from 1.7 percent.
The impact of slower demand for its exports means the economy in the Czech Republic is only expected to grow 2.5 percent this year, down from a previous forecast of 2.9 percent and 2018’s growth of 3.0 percent that was sharply down from 4.3 percent in 2017.
After slowing during the second quarter of last year, economic activity in the Czech Republic picked up in the third and fourth quarters, with gross domestic product in the fourth quarter up 2.8 percent from 2.5 percent in the third quarter.
While inflation is forecast to remain in the upper half of the central bank’s tolerance band this year due to price pressures and higher administered prices, the CNB said overall inflationary pressures are easing due to gradually falling wage growth, the fading impact of regulated price hikes and slower economic activity.
In March headline inflation accelerated to 3.0 percent from 2.7 percent the previous month but during the fourth quarter of this year inflation is expected to decelerated and by early 2020 it is expected to settle around 2.0 percent.
The CNB has a one percentage point tolerance range around its 2.0 percent target.
With Czech interest rates markedly higher than in the euro area, the CNB expects the koruna to firm this year to 25.3 on average against the euro but then ease to 24.7 in 2020 as the ECB returns to the path of monetary policy normalization.
During 5 years of extraordinary easy policy, the CNB not only lowered its key rate to a rock-bottom 0.05 percent but also intervened in foreign currency markets to keep the koruna low against the euro as an additional tool of easing.
As a first step toward tightening, the CNB in April 2017 scrapped its commitment to keeping the exchange rate of the koruna below 27 to the euro.
Since then the koruna has been largely steady against the euro though it slipped today following the CNB’s less-than hawkish statement.
The koruna was trading at 25.70 to the euro today, down from 25.64 before the rate hike and little changed since the start of this year.
The Czech National Bank issued the following statement:”
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