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Markets barely flinched at today’s decision by the Czech National Bank to leave its 2-week repurchase rate at 0.25%, as the move was fully priced in – all economists who provided Bloomberg with an estimate of today’s decision expected the Bank to keep rates on hold.

The CNB previously cut the repurchase rate by 75 bps on March 26 to mitigate the effects of coronavirus on its local economy, and followed with another 75 bps cut in May. This left the repurchase rate at 0.25%, slashing official borrowing costs more than anywhere else in the EU. This time around, policymakers expressed hopes for additional economic support to come from the fiscal budget, with CNB Governor Jiri Rusnok stating in an online debate last week that “nothing can have a more efficient impact in this situation than really massive government stimulus”. He added that there should be no more cuts and that the benchmark could stay on hold for several months, as cutting the key rate to or below zero could “undermine the stability of the financial sector” which is key to providing liquidity to the economy.

The Bank’s crisis response has been unique in the sense that so far most central banks have embraced asset purchase programmes as an indispensable tool during the pandemic, while the CNB’s policymakers have complemented their rate cuts by easing lenders’ capital requirements and loosening conditions on mortgages to support credit growth.

The CNB has chosen to stay away from quantitative easing as their inflation level is still above target and deflationary risks seem to be low for now.

The Czech Republic has almost fully eased restrictions after imposing one of Europe’s first and strictest lockdown measures to contain the spread of Covid-19 and cases have been slowing ever since. The nation’s main downside risk for its economy remains the resurgence is virus cases in neighbouring country Germany, the economy’s largest trading partner.

The Czech koruna initially plummeted more than its neighbouring currencies when the virus spread around Europe, but erased some of these losses and is now stronger than the 26.9 level the CNB had forecasted in May, reflecting an improvement in economic outlook and confirming the CNB’s choice to leave rates on hold today. The Czech koruna significantly weakened against the euro and US dollar both in the build-up to the announcement today, sending EURCZK higher, but the pair unwind from the day’s high after the decision was announced.

 

EURCZK to fresh highs in the build-up to CNB decision

 

Author: Ima Sammani, Junior FX Market Analyst

 

 

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