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Monetary Policy of the Czech National Bank

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Monetary Policy of the Czech National Bank making at the beginning of February, May, August and November. In the The CNB employs market instruments event of extraordinarily dramatic developments in the economy, however, MONETARY POLICY a new fast-track forecast can also be put together in the interim. in its monetary policymaking The Bank Board, however, holds a meeting regularly eight times a year; To implement its monetary policy decisions the CNB makes use of OF THE CZECH NATIONAL BANK besides already mentioned months also at the end of March, June, “indirect”, non-administrative market instruments. In other words, September and December. In these months, the Situation Report does he CNB makes monetary policy not by means of orders, prohibitions, not contain a new forecast but brings comparison of the latest key limits and suchlike, but by offering banks business transactions and macroeconomic figures with their forecast values, evaluates the situation commercial terms formulated in such a way that those banks in turn with respect to the possible future course of inflation, and updates the offer their partners transactions under terms the CNB views as desirable Principles, procedures, instruments The CNB is an independent at that particular moment. Through this basic mechanism, and via the uncertainties and risks attaching to the most recent forecast. Would you like to know a bit more about the Czech National Bank and open institution channels described earlier (i.e. via client interest rates, the Exchange than what you can find in the newspapers? The following fact sheet The meeting of the Bank Board usually begins at 9 a.m. with a discussion rate, etc.), the CNB’s monetary policy aims gradually spread through In the pursuit of its statutory objective, the CNB has a high degree will guide you around the world of the CNB. It’s a world that may seem of the Situation Report, which is always presented to the Bank Board more and more markets and transactions into the entire economy. of independence from political influence. Above all, it is independent by the Monetary and Statistics Department several days in advance. unremarkable, but the CNB’s work is in many respects crucial to the in making decisions on the settings of monetary policy instruments. The main CNB instrument is the two-week repo rate. Banks have the The board members are also provided with an opinion on the Situation Czech economy. Its independence is also reflected in the manner in which its senior option of depositing their excess liquidity at the CNB for a two-week Report under discussion, drawn up by one of their advisers, and a According to the Czech Constitution, the CNB’s primary objective officers are elected and dismissed (they are appointed and – under period on the basis of repurchase agreements (“repos”) at a rate not Monetary Policy recommendation. This document contains arguments is “to maintain price stability”. Without prejudice to this primary very strict conditions – dismissed by the Czech President). for the setting of higher/lower interest rates compared to the message exceeding the two-week repo rate. By changing the repo rate, the objective, the Czech National Bank is also tasked with supporting the The CNB’s independence protects it primarily from any political of the baseline scenario of the current forecast and a recommendation CNB influences short-term interest rates on the interbank market. “general economic policies of the Government leading to sustainable pressure to adopt measures to boost short-term economic growth, for by the Monetary and Statistics Department regarding the optimum This signal then spreads to interest rates throughout the economy, to economic growth”. This means that the CNB should set its main policy instance in the run-up to a general election. Such measures would in monetary policy action and the communication thereof. economic activity and ultimately to inflation. instrument, namely interest rates, at a level that will maintain inflation the longer term cause an undesirable rise in inflation, while growth in In some situations the CNB may use other instruments at its disposal. The discussion of the Situation Report at the Bank Board meeting opens at a low and stable level without needlessly slowing, or excessively economic activity would soon return to its original level, or even fall For instance, it may conduct FX interventions to influence the koruna with presentations by the Monetary and Statistics Department summing accelerating, the economic growth rate. below it (as a result of the increased inflation). up the main ideas and the message of the forecast, the Situation Report exchange rate and moderate excessive exchange rate volatility. The The CNB’s high degree of independence is counterbalanced by openness and the Monetary Policy Recommendation. The presentations end CNB has been using FX interventions since 2013 as part of its exchange with respect to disclosure of information. The CNB uses various channels with the formulation of the Monetary and Statistics Department’s own rate commitment with the aim of providing the required monetary High inflation damages the economy policy easing in a situation where monetary-policy interest rates have to inform the public about its monetary policy system, its inflation target, recommendation for the Bank Board in the area of the immediate interest The objective of achieving and maintaining low and stable inflation reached “technical zero”. its inflation forecasts and the attendant risks, and about its monetary rate settings and communication. Once the presentations are over, the is based on international experience that high and volatile inflation policy measures and its reasons for adopting them. To inform the public, members of the Bank Board are free to ask questions. In the final phase damages the economy. It causes this damage by creating uncertainty and the CNB not only issues quarterly Inflation Reports, which are submitted of the meeting, the Board goes into closed session to discuss the risks forcing money holders to focus on short-term projects. Economic growth, The Czech Republic’s accession to the Chamber of Deputies (the lower house of the Czech Parliament) and uncertainties of the current forecast and the overall monetary policy meanwhile, is founded primarily on longer-term investment. High inflation to the euro area and published on the CNB’s website, but also releases minutes of the context and to subsequently vote on the monetary policy action. This also hampers inflation forecasting and thus introduces various distortions CNB Bank Board’s monetary policy meetings, holds news conferences, vote is not necessarily always unanimous and the final decision can differ Upon the accession of the Czech Republic to the European Union and the into the economy: it changes the real value of debtors’ liabilities to their publishes articles and gives interviews in the press and other media, from the message of the current forecast and from the Monetary and Economic and Monetary Union, the CNB became part of the European creditors, creates distortions in the tax system, causes interest rates to be arranges presentations and speeches by Bank Board members, and so on. Statistics Department’s monetary policy recommendation. System of Central Banks. However, until the euro is introduced and the volatile (leading in turn to swings in the inflow and outflow of short-term CNB becomes part of the “Eurosystem”, the CNB will continue to conduct risk capital and hence to exchange rate fluctuations), and so on. Savers are The measures adopted are immediately disclosed in a press release and monetary policy autonomously. also often unaware that high inflation erodes the value of their savings. explained and expanded upon at an afternoon news conference, at The CNB steers inflation towards the which the ratio of the votes cast is also released. The press conference The Czech Republic has the status of “Member State with a derogation” The economic value of low inflation is also demonstrated by the fact official inflation target is made available to general public through audio and video recordings regarding the adoption of the euro, meaning that it will introduce the that maintaining inflation at low levels is currently the primary objective posted on the CNB website. A more detailed account of the discussion single currency later on. For EU member states, joining the euro area is of central banks in the majority of the advanced nations, including the Since January 1998, the CNB has conducted its monetary policy within leading up to the Bank Board’s decision is published eight days later in conditional on fulfilling the “Maastricht convergence criteria”. This is a European Central Bank. an inflation targeting system. Putting it simply, the CNB has undertaken the minutes of the meeting. This account in the end presents votes of set of requirements defining areas in which the candidate countries must to try to maintain inflation under normal external economic conditions the Bank Board members by name on the change in interest rates. On converge towards the euro area economies. on course for an announced inflation target. This system has some occasion of release of the CNB´s new quarterly forecast (in February, significant advantages over other monetary policy regimes (such as money The CNB is convinced that the Czech Republic should not join the euro May, August and November), a forecast of the future development of targeting and exchange rate targeting). First of all, it focuses directly on area before economic conditions allow for doing so. In particular, it is the key economic variables (overall inflation, monetary-policy relevant necessary to continue with the public budget consolidation process and inflation, GDP, the CZK /EUR exchange rate and the path of interest rates with the structural reforms to increase labour market flexibility. At the consistent with the forecast) is also disclosed at the press conference same time, the euro area debt crisis and the methods being used to Czech National Bank held on the day the decision is made, and on the CNB website.
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