Czech rate setters note Brexit risk but hold policy

By bne IntelliNews June 30, 2016

The Czech National Bank (CNB) offered no surprises at its monetary meeting on June 30, as it held interest rates and reaffirmed its commitment to defend the koruna cap at CZK27 to the euro.

The Monetary Policy Council (MPC) - the first to meet in the Visegrad region following the Brexit shcok - also noted the risk from the UK vote to leave the EU. It stressed that it is prepared to loosen monetary conditions by moving the exchange rate ceiling to a weaker level in the event that Brexit results in a “systematic” decrease in inflation expectations and wage growth.

The central bank kept the two-week repo rate was at 0.05%, the discount rate at 0.05% and the Lombard rate at 0.25%, in line with market expectations. The MPC repeated its guidance that it expects to drop the foreign rate commitment in mid-2017.

However, it admitted that Brexit could strengthen the likelihood of further stimulus. “The CNB ... stands ready to move the exchange rate commitment to a weaker level if there were to be a systematic decrease in inflation expectations manifesting itself in nominal variables, especially wages,” the bank said in the accompanying statement.

“This scenario is now definitely more likely than a week ago," analysts at KBC suggested ahead of the meeting, "but much will depend on the ECB and its response to the Brexit vote.”

The CNB said Britain's vote to leave the European Union creates an uncertainty for the forecast. “The result of the referendum in the UK, which implies its likely future exit from the EU, is a new uncertainty,” CNB governor Miroslav Singer told a news conference, according to CTK.

“The reactions of the financial and commodity markets and negative impacts on economic sentiment in Europe, the strength of which is difficult to predict, will mainly play a role in the shorter term," Singer said on the last day of his term as governor. Jiri Rusnok will take over as governor on July 1.

Still, the impact of the Brexit will not be sufficient to prompt additional monetary loosening, William Jackson at Capital Economics suggests in a note. “Admittedly, we do expect the euro-zone economy to slow next year, which will have some negative impact on growth in the Czech Republic. However, our central forecast is still that Czech inflation will rise towards target over the next 18 months,” he notes.

 

 

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