CNB likely to keep rates on hold tomorrow, likely to continue with gradual tightening in 2019

The Czech National Bank has hiked the interest rates five times in 2018 and the 2W repo rate is at 1.75 percent at present. This relatively high pace of monetary tightening was motivated by two factors. Firstly, the labor market has been a cause of worry from a monetary policy points of view, as the low jobless rate and high wage growth might spill over into inflation pressures. And secondly, the koruna has softened in the ear and has also begun impacting the Czech economy, noted Erste Group Research in a report.

Therefore, as the exchange rate component of monetary conditions was comparatively loose, the CNB had to tighten the interest rate component of monetary conditions at a higher rate than had previous been anticipated.

During the next meeting, which is to be held tomorrow, the CNB is likely to keep the rates on hold. Next year, the central bank is expected to continue with its gradual tightening of monetary policy. Nevertheless, the development of the koruna would be an important factor impacting the rate of interest rate rises.

If the currency begins appreciating again, the CNB is likely to deliver just one additional hike in approx. the mid of 2019, as an appreciating koruna should tighten monetary conditions sufficiently.

“However, if the koruna remains weak, the CNB will hike three times in 2019, in our view, out of which the first one could occur in February. In 2020, we expect two additional interest rates increases”, added Erste Group Research.