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Czech raises rate 2nd time on strong growth, inflation

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     The Czech National Bank (CNB) raised its benchmark interest rate for the second time this year, saying “a gradual tightening of monetary conditions will not jeopardize the recovery of the Czech economy from the pandemic and will reinforce the confidence of Czech economic agents in long-term price stability in our country.”
     The central bank for the Czech Republic raised its 2-week repurchase rate by 25 basis points to 0.75 percent and has now raised it 50 points following a similar hike in June when it said its policy stance was likely to be entering a phase of rising rates during the second half of this year.
      The CNB did not reiterate this phrase today – even as it raised its outlook for inflation and growth this year – but said its latest forecast was slightly anti-inflationary due to the risk of a faster-than-expected rise in the koruna’s exchange rate from capital inflows and uncertainties that could impact economic activity.
      The inflationary risk to the forecast stems from a greater and longer overloading of global supply chains that would push up producer prices even further, CNB added.
     In addition to raising its 2-week repo rate, the bank’s board raised the Lombard rate, the cost of short-term loans to banks, by 50 basis points to 1.75 percent but left the discount rate unchanged at 0.05 percent.
     The board was split in its decision, with one member voting to raise the key rate by 50 basis points, two voting to maintain rates and four voting for the 25-point rate hike.
     The bank’s key rate is now back to the level it reached between February and May 2018 when the CNB was in the midst of a tightening campaign after a 5-year period of rock-bottom rates in the wake of the European sovereign debt crises.
     This monetary tightening cycle came to a screeching stop in March 2020 when the central bank had to reverse a rate hike in the previous month as the COVID-19 pandemic swept through the world.
     In March last year CNB cut its rate twice and then followed up with a cut in May for total rate cuts of 2.0 percentage points to cushion the economy from the pandemic.
     But with inflation worldwide accelerating following a rise in commodity prices, especially food and oil, along with a rebound of demand, central banks are beginning to pull back the extraordinary stimulus unleashed last year.
     This week alone, four central banks – Armenia, Georgia, Brazil and now the CNB – have raised their rates, pushing up the global number of rate cuts this year to 41 in 21 countries. 
      With inflation in the Czech Republic rising, the CNB in March began tightening its policy by raising banks’ countercyclical buffer – which had been slashed last year to support banks’ ability to lend.
     After jumping to 3.1 percent in April from a low this year of 2.1 percent in January, headline inflation in the Czech Republic eased to 2.8 percent in June,  within CNB’s tolerance range of 2.0 percent, plus/minus 1 percentage point.
     However, inflationary pressures are building, with producer price inflation hitting 6.1 percent in June, the fastest since May 2011, and core inflation – which strips out regulated prices, food and fuel – rose to 3.5 percent from 3.1 percent in May.
     CNB raised its forecast for consumer prices to rise 3.0 percent on average this year, up from its previous forecast of 2.7 percent, and then rise 2.8 percent in 2022, up from 2.4 percent.
     ”Inflation will rise well above the upper boundary of the tolerance band around the 2% target in the quarters ahead,” the bank said, adding administered prices will also rise.
     But inflation pressures will start to gradually ease at the end of this year as import prices come off the boil and by 2023 inflation is seen close to the bank’s target at 2.1 percent.
     With the monetary policy of the European Central Bank (ECB) set to remain easy, CNB expects the koruna to rise beyond 25 to the euro in late 2021 and continue to rise, reaching an average rate of 24.5 in 2022 and 24.2 in 2023 from 25.6 this year.
     The appreciation in the koruna reflects a widening of the interest rate differential to the euro, a recovery of overall demand, the export of as yet unfinished products and an inflow of foreign capital.
     Shortly after the bank’s rate hike, the koruna continued its rise since October last year and rose to 25.4 to the euro, up 3.1 percent this year, 7.5 percent since late October 2020, and up 9.4 percent since a low of  27.8 hit in March last year during the height of the pandemic crises.
     The Czech economy has bounced back rapidly from last year’s contraction of 5.6 percent with gross domestic product in the second quarter 7.8 percent above the same quarter last year, up from a contraction of 2.4 percent in the first quarter.
     ”Renewed economic growth will be driven by strongly recovering household consumption, aided, among other things, by the release of part of the forced savings created during lockdowns,” CNB said.
     The central bank raised its forecast for growth this year to 3.5 percent from the earlier forecast of 1.2 percent but lowered the 2022 forecast slightly to 4.1 percent from 4.3 percent. 
      In 2023 the economy is seen growing 3.0 percent, a level the bank said was its “steady-state.”
     

         The Czech National Bank issued the following statement:

    “At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate by 25 basis points to 0.75%. At the same time, it increased the Lombard rate to 1.75% and kept the discount rate unchanged at 0.05%. Four members voted in favour of this decision, one member voted for increasing the two-week repo rate by 50 basis points and two members voted for leaving rates unchanged. Minister of Finance Alena Schillerová also attended the Bank Board meeting today. 

The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is a rise in market interest rates from the middle of this year onwards. This is in response to increased price pressures from the foreign and domestic economies and to the risk of undesirable deviation of inflation expectations from the CNB’s 2% target.

The economies of our main trading partners will continue to grow in the second half of this year thanks to an easing of the anti-epidemic measures in spring and early summer. The overloading of global production and supply chains is expected to abate gradually. Recovering foreign economic activity and strong growth in prices of commodities, materials and components are reflected in currently elevated inflation pressures in the production sector. These will gradually subside in the second half of this year as commodity prices correct and demand switches partially back to services. Foreign consumer price inflation will exceed 2% this year. However, it will slow next year as some temporary inflationary factors dissipate. The monetary policy of the European Central Bank will stay very accommodative. The outlook for euro interest rates therefore remains negative.

The Brent crude oil price outlook has shifted higher compared with the previous forecast in expectation of a more robust economic recovery after the pandemic. However, oil prices are expected to decline slightly from their current elevated levels. The euro-dollar exchange rate is little changed from the previous forecast and does not stray far from the current level over the next two years. 

The Czech economy is recovering from the impacts of the coronavirus pandemic. A retreat of the pandemic led to most of the restrictions in wholesale, retail and services being lifted at the end of spring. The reopened businesses were thus able to catch their breath again. If the anti-epidemic measures were to be partially tightened for a time in the rest of summer or during the autumn due to a rise in new cases, it should no longer have tangible economic effects. This will be due to increasing vaccination coverage and effective new forms of medication, and also to the fact that the economy has learned to cope better with the coronavirus. Renewed economic growth will be driven by strongly recovering household consumption, aided, among other things, by the release of part of the forced savings created during lockdowns. Consumer sentiment will also be boosted by a gradual improvement in the labour market situation. The overloading of global supply chains, which is currently hindering the production and export performance of Czech industry, will weaken over the rest of this year. According to the CNB’s new forecast, the Czech economy will thus grow by more than 3% overall this year. Next year, its growth will increase slightly further and the output of the economy will thus return to the pre-pandemic level. In 2023, GDP will return to its steady-state growth rate.

Inflation will rise well above the upper boundary of the tolerance band around the 2% target in the quarters ahead. This will be due to an upswing in food price inflation coupled with continued high core inflation and strong fuel price inflation. This will later be joined by renewed administered price inflation. The currently strong overall inflation pressures will start to ease gradually at the end of this year. This will be due partly to a slowdown in the currently rapid growth in import prices. Domestic price pressures will continue to rise slightly for some time yet, mainly on the back of increased consumer demand and a gradual pick-up in wage growth. The latter will be supported by a further marked increase in the minimum wage at the start of next year. Next year, inflation will return towards the 2% target, aided by this year’s tightening of monetary conditions.

According to the forecast, the koruna will appreciate further, strengthening beyond CZK 25 to the euro in late 2021 and early 2022. This will primarily reflect a recovery in aggregate demand, the export of as yet unfinished products, and an inflow of foreign capital due to improved sentiment. A strengthening koruna will also be strongly fostered by a widening interest rate differential vis-à-vis the euro area due to a rise in domestic market rates.

Consistent with the summer forecast is a rise in market interest rates from the middle of this year onwards. A monetary policy response is needed in view of the robust price pressures from the domestic economy and abroad. Inflation is being fostered by the improving condition of the domestic economy, brisk wage growth and high growth in foreign producer prices this year. At this stage, a gradual tightening of monetary conditions will not jeopardise the recovery of the Czech economy from the pandemic and will reinforce the confidence of Czech economic agents in long-term price stability in our country. 

By comparison with the previous forecast, the inflation outlook is higher for this year and the next. Economic growth this year has also been revised upwards, whereas its forecast for next year is little changed. The outlook for domestic interest rates in higher for both years. Compared with the previous forecast, the koruna will appreciate rather faster, especially next year.

The Bank Board assessed the uncertainties and risks of the new forecast as being slightly anti-inflationary overall. Greater or lengthier overloading of global supply chains, which could result in even stronger growth in producer prices, is an inflationary risk to the forecast. Conversely, possible faster-than-forecasted appreciation of the koruna due to larger capital inflows may pose a slight anti-inflationary risk. The uncertainty associated with the evolution of domestic economic activity is acting in the same direction.”

    www.CentralBankNews.info

    



Source: http://www.centralbanknews.info/2021/08/czech-raises-rate-2nd-time-on-strong.html



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