At last week’s regular monetary policy meeting, members of the Czech National Bank’s board voted unanimously to cut the bank’s key repo rate by 75bp. The decision came on the heels of its 50bp cut on Monday of previous week. The main reason for the cut was the still-worsening growth outlook for the Czech economy due to measures introduced in the Czech Republic to prevent the spread of COVID-19. Since the last monetary policy meeting, the interruption to production of the nation’s automotive industry was announced. Together with the shutdown of most services, the preventive measures now involve almost the entire economy. Consequently, the Czech National Bank expects Czech GDP to decrease on a year-on-year basis this year. Negative developments abroad would have unfavourable implications for the Czech economy. In part, the impact would be offset by a weaker koruna, lower oil prices and fiscal stimulus.
We expect the CNB to cut rates by another 50bp if the COVID-19 pandemic has an even more severe impact on the Czech economy. At yesterday’s press conference, the central bank said that it could cut rates again at almost any time. While the bank’s board meets every Thursday, an extraordinary meeting can also be called. We saw that happen last week. Our expectations are therefore state dependent, rather than time dependent. On the one hand, interest rate prospects will depend on the duration of the economically paralyzing preventive measures taken in the Czech Republic. The emergency order lasts through 11 April but could very well be extended. The longer the economic shutdown is, the more devastating its impacts will be. On the other hand, because of the Czech Republic’s economic openness, the recovery will broadly depend on growth abroad.
The central bank confirmed its readiness to intervene in the FX market and to use available tools to protect financial stability. Although the koruna trend reversed slightly yesterday, it is still above the 27 CZK/EUR mark and remains volatile. As a result, the CNB has repeated its willingness to enter into the FX market to defend any koruna weakening that it considers excessive. The bank did not cite a trigger value for CNB action, but the governor said that the value has been set internally. We still think the trigger could be above 28 CZK/EUR. To protect financial stability, the bank decided to decrease the rate of the counter cyclical buffer starting on 1 April from 1.75% to 1.0% and is ready to remove it completely when necessary. The CNB is also prepared to buy government bonds in large quantities. Now, it can buy bonds without limitation only from commercial banks. Purchases from other financial institutions are limited only to short maturities. However, the legislation is expected to change shortly, allowing for unlimited purchases from other financial institutions as well, which would further promote stability in the financial sector. But, the central bank did not cite if planning the usage of this tool in near future. It was a disappointment for the market, which expected its application as soon as possible. According to us, the bank would use the measure in case of sudden outflow of foreign capital, which could happen due to a deterioration of public finance or worsened development abroad.
20th April 2020