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Czech Republic: CNB still on hold
Thu, Jun 26 2008, 13:05 GMT
by Lars Christensen, Violeta Klyviene
Despite still strong inflationary pressures the Czech central bank (CNB) today decided to keep its key policy rate unchanged at 3.75%, where it has been since its previous hike in February 2008. There is no doubt that the Czech korunas (CZK) record strength and the expected cooling of the national economy are the main reasons why the CNB today decided to keep interest rates on hold despite the fact that inflation still remains well above the CNB target.
Certainly, the majority opinion among CNB board members is that the recent jump in inflation is due to temporary or oneoff factors and that inflation will start to ease later this year. Consequently, the CNB is likely to continue to closely monitor the CZK. Provided it remains strong we do not expect the central bank to tighten its monetary policy further. Over the last 12 months, CZK has appreciated by more than 16% against the EUR and by a substantial 27% against the USD.
However high and volatile oil prices are exerting strong pressure on inflation in all European countries. With fuel costs at record highs, the danger of more "second round" effects increases significantly. As a result, we see a risk that inflation will not fall as fast as the CNB currently expects, which could force the bank to tighten its monetary policy. However, as that is far from being the CNB boards biggest concern in our view, we see no reason why markets should begin to discount a further rate hike in the immediate future. In fact we believe some CNB board members (unlike markets) expect the next rate move will be downward rather than up.
Published on Thu, Jun 26 2008, 13:08 GMT
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