Czech National Bank likely to keep interest rate on hold in remainder of 2019

Given the tight labor market and rebounded euro area data in the first quarter of 2019, the Czech National Bank had decided to hike rates in May. However, according to an Erste Group Research report, the central bank is expected to keep the interest rate unchanged for the remainder of 2019.

The central bank appears to be set adequately now, with no imminent need for another hike in the quarters ahead. Also the CNB is expected to be cautious in the second half of 2019, due to possible risks coming from external development. If the situation in the euro area deteriorates, the CNB might cut rates at the end of 2019.

As the labor market might remain tight and ease only gradually, inflation is likely to be above target in the first half of 2020. Therefore, the CNB might add one additional 25 basis points hike in 2020, which might be around mid-2020.

“In our view, this could be the last hike during this phase of the business cycle, as the expected return of the koruna to its appreciation trend will lower the need for a more hawkish policy”, added Erste Group Research.