Czech Republic: Central Bank leaves rate unchanged, reaffirms currency ceiling
December 16, 2015
In its last meeting of 2015 on 16 December, the Czech National Bank (CNB) kept the two-week repo rate on hold at 0.05% for the 25th consecutive meeting. The Central Bank also reaffirmed its one-sided commitment to intervene in the foreign exchange market in order to keep the Czech koruna from appreciating to below CZK 27.0 per EUR, which will probably remain in place until late 2016. The ceiling for the exchange rate was set in November 2013 in order to relieve deflationary pressures and to lift inflation toward the Bank’s 2.0% target.
The CNB stated that inflation fell short of its projections in November, remaining far below the Bank’s 2.0% target. However, inflation is projected to pick up and reach the target in 2016 and slightly to exceed it in 2017. In the Bank’s view, a “sustainable fulfilment” of the inflation target—which the CNB sees as a condition for the removal of the currency cap—will be achieved at the outset of 2017. Furthermore, in the CNB’s view, the risks to the inflation outlook are broadly balanced. Anti-inflationary risks arise from low prices for food, ongoing deflation abroad and the continued drop in oil prices, while inflationary risks arise from domestic wage gains and the, “probable non-materialisation of the forecasted decline in administered prices.” As for economic activity, the Bank stated that GDP grew at a slightly lower-than-expected rate of 4.5% in the third quarter of 2015, mainly because private consumption growth undershot expectations. All components of the domestic economy recorded expansions in Q3, but the external sector again restrained overall growth. Adding to this, the Bank noted that unemployment in Q4 was broadly in line with its projections, while Q3’s expansion in the average wage slightly exceeded expectations. The next monetary policy meeting is scheduled for 4 February 2016.