Czech Central Bank Holds Rate Steady At 3.5% On Rising Inflationary Risks

(RTTNews) - The Czech National Bank left its key interest unchanged for a third policy session in a row as policymakers assessed that inflation is set to remain elevated for the rest of the year, ruling out further easing.

The Monetary Board, led by Governor Ales Michl, voted 7-0 to hold the two-week repo rate steady at 3.5 percent on Wednesday, in line with expectations. The previous change in the rate was a 25-basis points reduction in May.

The Czech central bank stressed on the need to maintain a tight monetary policy in the face of rising inflationary risks. The bank observed that services inflation and the contribution of property prices to inflation remain particularly elevated.

"Today's decision aims to stabilize headline inflation close to the 2 percent inflation target in the long run," the bank said in a statement. "This requires growth in the quantity of money in the economy not to accelerate excessively and credit growth to remain moderate. By ensuring this, monetary policy will help keep inflation low."

The central bank's updated projections showed that inflation is set to stay in the upper half of the CNB's tolerance band for the rest of the year and core inflation will remain elevated. Headline inflation eased to 2.5 percent in August and core inflation was 2.8 percent.

"The ongoing inflation pressures from the domestic economy currently preclude a further decrease in interest rates," the CNB said.

The Czech economic growth eased to 0.5 percent in the second quarter from 0.7 percent in the first three months of the year.

Policymakers assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as inflationary overall, the bank said. A stronger koruna exchange rate was the only possible anti-inflationary risk during the forecast period.

Future interest rate decisions will mainly depend on the evaluation of the persistence of the low-inflation environment, koruna exchange rate developments, the effect of fiscal policy on the economy, an analysis of the tightness in the labor market, and changes in domestic and external demand, the bank added.