Czech National Bank likely to keep monetary policy on hold for now

The Czech National Bank’s board is expected to keep its policy unchanged at its meeting on Thursday, noted Societe Generale in a research report. The central bankers are likely to affirm that the forward guidance for the EUR/CZK floor will be kept until mid-2017. The talks during the meeting are expected to be dominated by the previous week’s Brexit vote and the surrounding threats to the domestic and global economies. However, the projections of the new staff are unlikely to be ready until the next meeting in August.

“As of now, we maintain our call for an exit in Q3 17, but acknowledge that the risk of a later exit has significantly increased,” said Societe Generale.

The Czech Republic’s economy in the first quarter had grown 3 percent year-on-year, thanks to household consumption. Meanwhile, public investment had dropped on par with expectations. Industrial production contributed the most to the value added, followed by private services. Even if the real economic activity of the Czech Republic continued to be strong, inflation weakened to almost zero in May, coming in at just 0.1 percent year-on-year.

During its last meeting, the central bank’s board members had decided that the floor will likely be “discontinued in mid-2017, in line with the forecast”. A key condition for the exit is that the inflation reach the target rate of 2 percent, which is expected to happen in the second quarter of 2017. According to Societe Generale, inflation is likely to hit the target rate by the third quarter, and hence the floor is unlikely to be scrapped before then.

Meanwhile, the Brexit decision is expected to have a limited effect on the economy. According to an earlier analysis by Societe Generale, the global shock would decelerate the GDP growth by 0.4 percentage points in 2017 that would lead to an economic growth of about 2 percent next year. Furthermore, the drag on the inflation is expected to be a similar scale (0.4 percentage points in 2017), which would result in the CNB missing the target rate of 2 percent.

The Czech National Board is expected to keep a wait-and-see stance for now. The central bankers are likely to make statements that the global scenario at the moment is anti-inflationary with Brexit being a considerable risk on the downside to the present projection.