Whilst the US Federal Reserve announced an emergency half percent cut in interest rates on Tuesday, the Czech National Bank (CNB) is giving out the message that they are not going to panic and feel they can wait before taking action. Photo credit: ZM / Brno Daily.
Czech Rep., Mar 9 (BD) – In February the bank unexpectedly raised interest rates to combat rising inflation. This sparked a Trump like social media commentary from Prime Minister Babiš. “I don’t understand; how come the CNB wants to raise interest rates for commercial banks at a time of an economic slowdown. It’s going against the people, industry, and the economy as a whole,” was one such comment. The bank is independent of the government as this clearly demonstrates. However, a new governor is due to be appointed in 2022 and they, like the other members of the board, are appointed directly by the president who has generally been keen to support the Prime Minister. All of this may be in some members’ minds as they take decisions in the coming months. Babiš also wrote “I don’t understand the CNB’s policy at all.” But as pointed out in a Bloomberg article, it is clear ‘the Czech central bank is trying to weigh the impact of the global slowdown on the export-oriented [Czech] economy against strong household spending, which has helped push inflation above the bank’s 3% tolerance limit.’
Since then, the panic about coronavirus has spread to the stock markets and on Tuesday the US Federal Reserve made an emergency 0.5% cut in interest rates – the first since the financial crisis. This, however, had little effect on financial markets, which continued to fall. Coronavirus will also hit the global economy and the Czech Republic will not be exempt. As is usual in times of uncertainty, investors seek what they see as safe investments and as a result the Czech crown has fallen against the Euro from under 25 to 25.46 to the euro on Friday. So is the bank going to respond to any of this?
Bank Deputy Governor Marek Morek gave an interview this week to Lidové Noviny, seemingly with the intention of calming things down. The key points from the interview are that the bank sees the impact of COVID-19 as relatively short term, but that there could be a profound negative impact on the economy if the ‘medical uncertainty’ lasts for a long time. Asked if the bank would take steps to help the economy, he said it is a case of wait and see how the situation develops. Morek is clear the bank’s ‘primary goal is price stability.’ At the moment the bank sees the current economic issues surrounding coronavirus as a short term problem. The bank ‘ should respond only to medium and long-term shocks.’
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