Czechia: Monetary tightening while economy slows

3 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

Last week, the Czech National Bank (CNB; the central bank) raised its key policy interest rate by 25bp to 2.0%, a move that contrasts with the stance of many other central banks which recently have halted tightening or even turned more expansionary against the backdrop of moderating global growth. The CNB argued that it expects consumer price inflation to remain in the upper half of its 2% ± 1pp target range this year. Indeed, CPI inflation hit the 3% upper bound of that band in March, however, mainly due to strong price rises for foodstuff and energy. Hence, core inflation remained in check, at 2.1% in March (after 2% in February). Meanwhile, the econ­omy shows clear signs of cooling. The Manufacturing PMI has been below the 50.0 threshold since December 2018 (46.6 in April) indicating contraction, mainly due to subdued demand and declining new orders. Industrial production growth dropped to +0.2% y/y in Q1 from +2.3% in Q4. We may revise downwards our current GDP growth forecast of +2.5% for 2019 (after +3% in 2018) following the release of Q1 growth estimates next week.