At its meeting Wednesday, the CNB Board left interest rates at the current level. The two-week repo rate (the 2W repo rate, on which the interest on commercial loans is derived) thus remains at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%. The CNB stated this in today’s communication. Governor Jiří Rusnok subsequently stated that the uncertainties and risks regarding the further development of the economy are still very significant. This could lead to a later increase in interest rates than projected in the forecast. According to him, this corresponds first to the stability of market interest rates, followed by their gradual increase from about the middle of this year.
We do not see a “stabilized and clearly crystallized pandemic situation” now, Rusnok said at a press conference, adding that most members of the Bank Board had the impression that a bigger mistake would be to cut rates prematurely. A later step in this sense would not have irreparable consequences. According to CNB Vice Governor Tomáš Nidetzki, the first signal for a debate on raising rates will be to resolve the pandemic situation. According to him, the agreement at today’s meeting of the Bank Board was also that the Board does not perceive such a risk of delay in a possible increase in rates as in their possible premature tightening.
Rusnok was absent from part of the Bank Board meeting today because he took part in negotiations on an amendment to the CNB Act in the Chamber of Deputies. He was therefore seconded at the press conference by Vice Governor Nidetzky.
“The Bank Board assessed the uncertainties and risks of the forecast in the context of the ongoing pandemic as still very significant. This could lead to the need to keep monetary conditions relaxed for a little longer than in the forecast,” Rusnok said.
According to the current forecast, the CNB should start raising interest rates in the second quarter and do so a total of three times this year alone. “Given the pandemic situation and the uneven development of the economy, it is likely that this ambitious ‘plan’ will not work out, probably despite higher inflation than expected for the time being,” ČSOB economist Petr Dufek wrote in a comment this morning.
The decision of the seven-member Bank Board to keep rates at the current level today was expected on the markets and, according to the CNB, was unanimous. After the initial hesitation, the Czech koruna weakened against the euro to 26.265 from the level of the previous conclusion of 26.20, where it remained before and immediately after the announcement.
Also at the last monetary meeting on February 4, the council unanimously left interest rates unchanged. It last changed them last May 7, when it lowered the key interest rate by 0.75 percentage point to 0.25 percent. Earlier, the council cut interest rates twice in March. The aim was to mitigate the economic impact of the spread of coronavirus. Several members of the CNB’s Bank Board have recently stated that the first rate hike could come in the second half of the year, when more information is available on the state of the economy and the development of the pandemic. If the CNB were to raise rates this year, it would probably become the first central bank in Central Europe to start tightening monetary policy after a sharp easing last spring.
According to the new macroeconomic forecast presented in February, the CNB expects real GDP to grow by 2.2% year on year this year. The CNB expects average year-on-year inflation to be 2.0% for this year and 2.2% for 2022. According to the new forecast, the CNB expects the average exchange rate of the Czech koruna to be CZK 25.8 per euro this year and CZK 24.9 in 2022 for the euro.
Source: Jana Knechtlová – Patria Finance, CNB, CTK, Patria.cz and Reuters
