The bank board of the Czech National Bank (CNB) unanimously left interest rates unchanged on August 6. The two-week repo rate remained at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%, according to a CNB statement.
“Decision adopted by the bank board is underpinned by a new macroeconomic forecast. Consistent with the forecast is stability of domestic market interest rates until mid-2021, followed by a gradual rise in rates. In the context of the ongoing coronavirus pandemic, it must be stressed that the uncertainty regarding the external and domestic assumptions of the new forecast and the way they are captured by the forecasting system is again high,” the CNB said.
As the CNB governor Jiri Rusnok noted, a change in the CNB's interest rates is unlikely before the end of the year.
“The CNB board assessed the risks of the forecast as significant, but not biased in either direction. One of the highest uncertainties is the speed of both the European and domestic economic recovery. The development of the exchange rate may be an anti-inflationary risk, while fiscal policy in the coming years may be stronger than expected, thus pro-inflationary,” commented ING chief economist Jakub Seidler.
According to the CNB, although the quarantine measures have been almost fully lifted, reduced external demand, a marked rise in unemployment and worse overall perceptions of the economic situation among Czech firms and households will have an adverse effect on the economy in the months ahead.
This will lead to a decrease in GDP of around 8% overall this year, due mainly to a drop in private investment, followed by a return to growth in 2021, while reaching the pre-pandemic level at the end of 2022.
“The recovery in investment will be hindered by a deep downturn in external demand reflecting significantly worse global economic sentiment. At the same time, the exports of Czech corporations will decrease. This will be reflected in a negative contribution of net exports,” the report read.
As CNB stressed, the negative impacts of the coronavirus pandemic are being softened by faster growth in government consumption coupled with stabilising budgetary measures, which are supporting household consumption above all.
Inflation will remain above the upper boundary of the tolerance band for the rest of this year, mainly due to buoyant core inflation and rapid growth in food prices. The inflation outlook for the next four quarters is higher than in the previous forecast.
“The continued price growth in the months ahead will reflect efforts by firms to make up the loss of revenues they suffered during the coronavirus pandemic and for growth in their costs. Over the monetary policy horizon, i.e. in 2H21, however, the deep decline in demand and overall economic activity will prevail and inflation will return close to the 2% target,” the CNB said, adding that this will be fostered by lower growth in domestic costs, a slightly appreciating koruna and a cooling of the labour market. Consumer price inflation will stay close to the target in 2022.
“The tone of today's news conference and Q&A session should be rather neutral for the market, as there were no big surprises. Also, governor Rusnok did not indicate that the CNB is anyway concerned by a stronger exchange rate approaching the 26 EUR/CZK border, which some market players could have feared before the conference. As such, no surprise from the CNB today, either in the policy setting nor in the revised macroeconomic forecast,” Seidler concluded.