Czech c-bank expectedly keeps rates at record low, cap on koruna to stay until 2016

By bne IntelliNews September 25, 2014

The Czech central bank decided on September 25 to hold interest rates at record-low levels in line with analysts’ expectations and said it will maintain its weak-koruna regime as inflation continues to undershoot its outlook.

The bank reiterated its commitment to prevent the koruna from strengthening beyond 27 per euro. That commitment was one-sided, meaning the koruna can float freely on the weak side of the level.

The bank’s board voted unanimously to keep the main two-week repo rate at 0.05% for the 15th straight meeting after cutting it down by 20 basis points in November 2012. The Lombard rate that provides a ceiling for short-term interest rates on the money market was left at 0.25% and the discount rate that represents the floor for short-term money market interest rates was kept at 0.05%.

The central bank intervened on the foreign-exchange market in November to weaken the koruna and further ease monetary conditions after slashing interest rates close to zero a year earlier amid a nearly two-year recession that has since ended. The weak-koruna regime targets to fuel inflation and stimulate growth by increasing the competitiveness of the country’s exports. The currency-targeting regime has helped the economy avert the threat of deflation but consumer prices continue to post very weak annual growth rates. According to the latest data from the statistics office, inflation edged up to 0.6% y/y in August from 0.5% in July. The bank expects inflation to pick up pace in Q3 returning to its target of 2% in the second half of 2015.

The bank plans a change in its policy once the domestic price environment secures the economy far from the threat of deflation. It said it will keep the cap on koruna until 2016.

Risks to the Czech central bank's economic forecast are slightly anti-inflationary reflecting lower growth and price developments in the euro zone as well as lower global oil and food prices, the bank said. By contrast, data from the domestic economy, especially observed inflation and wage growth, are having a slightly inflationary effect. 

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