Czech National Bank holds in February

Rates unchanged for sixth consecutive meeting: On 5 February, the Czech National Bank (CNB) stood pat, leaving its two-week repo rate unchanged at 3.50%—the lowest level in over four years. The sixth consecutive hold was unanimous among members and in line with market expectations.

Domestic risks drive hold: The CNB opted not to cut rates, as domestic inflationary risks remained elevated. The Bank cited the deteriorating budget deficit, rapidly rising service and housing costs, and wage plus credit growth. On the other hand, inflation continued to trend down through January, diminishing the need to hike rates.

Panelists split over monetary policy trajectory: The Bank struck a hawkish tone in its release, suggesting that a tight monetary stance is required to keep inflation near its target of 2.0% once temporary downward pressures fade. The vast majority of our panelists see rates on hold through year-end, while the rest expect rates to end the year below current levels. Future decisions will likely hinge on the strength of the koruna and inflation ahead. Momentum in the Czech Republic’s top trading partner, Germany, remains key to monitor. The Bank will reconvene on 19 March.

Panelist insight: Commenting on the outlook, ING’s Frantisek Taborsky commented: “We have changed the rate cut call from March to May after this morning's inflation report, which seems like the best possible expectation at this point. However, we wouldn't say that a March cut is off the table completely if headline inflation surprises to the downside in February due to a correction in food prices and further disinflation in energy prices. But we believe it is a safer case for the CNB to wait for more data prints and a new forecast in May, where core inflation should also fall somewhat in the meantime.” Economists at EIU stated: “The primary mandate of the Czech National Bank (CNB, the central bank) is to maintain price stability, by targeting annual inflation of 2%, and we expect the two-week repo rate (the official policy rate) to remain at its current level of 3.5% in the medium term.”

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