Czech National Bank hikes repo rate by 25 bps, hints at another hike in 2018

The Czech National Bank raised its repo and lombard rates during its meeting today. The central bank hiked the repo rate by 25 basis points and the lombard rate by 50 basis points. The CNB governor strongly hinted that the central bank might hike again in 2018. Meanwhile, the CNB cut its inflation and interest rate projections for the medium-term, which affirms that recent weak inflation dynamics have surprised forecasters. If CNB were to continue raising rates without waiting for the inflation trend to become clearer, this might put more appreciation pressure on the koruna, noted Commerzbank in a research report.

“We see EUR-CZK reaching 24.50 by the end of this year”, stated Commerzbank.

The CNB lowered its projections for 2019 inflation, expecting it to reach 1.9 percent by the first quarter of 2019 and moderating to 1.8 percent by the second quarter of 2019. Inflation in the euro area is not accelerating as many CEE central banks had assumed. According to Commerzbank, euro area inflation is expected to remain flat at around 1 percent through to year-end. Czech imported deflation is intensifying, which signifies that for overall inflation to sustainably remain at the 2 percent target, domestic demand driven inflation would have to more than outweigh regional factors.

According to Commerzbank, the Czech National Bank is expected to hike rate by 25 basis points in early May and keep the policy rate flat thereafter.

“Our assumption that inflation will remain somewhat high in the near-term, but soften later, makes us expect this rate hike sooner in the year rather than later”, added Commerzbank.

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