On 4 May, the Czech National Bank unanimously decided to keep its policy rates on hold. The CNB does not appear to be in haste to hike rates at the moment. Also, it cut its three month PRIBOR forecast for 2018 from 1.1 percent to 0.8 percent. Governor Rusnok highlighted that the main uncertainty for future rate hikes continues to be the evolution of the exchange rate and has signalled that additional rate hikes might be required if the current moderate CZK strengthening continues.
But for now, the Czech central bank’s view appears to be that there is no requirement for immediate policy action, even if inflation exceeds the 2 percent target for some time. The first 20 basis point hike is expected only in the fourth quarter of this year, noted Danske Bank in a research report.
The Czech National Bank made just minor changes to its economic projections, forecasting slightly lower inflation at the end of this year and the next year. GDP growth projection for this year was upwardly revised to 2.9 percent from 2.8 percent. Inflation is expected to stay elevated in 2017, underpinned by a tight labor market and accelerating core inflation.
After the exit, the EUR/CZK has been trading in a 26.5-27 range, while volatility has been lower than anticipated, creating no need for the central bank to intervene om the market, according to Rusnok. In the medium-term, CZK is expected to strengthen more, while EUR/CZK is expected to trade around 25.5-26 range in 2017, according to Danske Bank. This is based on strong economic fundamentals, a current account surplus, REER undervaluation and relative monetary policy divergence as the ECB continues its accommodative policy. Czech Republic’s monetary conditions are expected to move in a more hawkish direction.
