Czech National Bank on hold, signals readiness to raise EUR-CZK floor in case of sustained disinflation

The Czech National Bank (CNB) decided to leave its policy rate unchanged at Thursday's board meeting as widely expected. The two-week repo rate was maintained at 0.05 percent, the discount rate at 0.05 percent and the Lombard rate at 0.25 percent.

The CNB Bank Board also decided to continue using the exchange rate as an additional instrument for easing monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna to keep the EUR-CZK floor near 27.00. For a third time this year, the board signalled that it is ready to move the floor up in a scenario of further sustained disinflation.

The bank board repeated that the EUR-CZK floor will stay through the first half of 2017, with exit likely around mid-2017. CNB raised its 2016 GDP growth forecast slightly from 2.3 percent to 2.4 percent. The bank board continues to see inflation accelerating because of tightening labour market and rising wages. By the end of 2017, CNB forecasts inflation to reach 2.4 percent. 

The Czech Republic was one of the fastest growing European economies in 2015, and clocked in a growth rate of 4.3 percent. Economic data this year has taken something of the shine of 2015’s performance.  In July, the manufacturing Purchasing Managers’ Index (PMI)—calculated by IHS Markit—fell from June’s 51.8 to 49.3, for the first time since April 2013.

"We expect CNB to drop rates into negative and also extend the FX target out to beyond end-2017," said Commerzbank in a report.