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Czech CB Lowers Rate For Third Time, Unveils More Stimulus

The Czech Republic's central bank cut its key interest rate in May for a third policy session in a row and unveiled additional measures to provide more liquidity to the financial market after the coronavirus, or Covid-19, pandemic hurt economy severely.

The Bank Board of the Czech National Bank voted 5-2 to cut the two-week repo rate by 75 basis points to 0.25 percent, while economists had expected a 50 basis points reduction.

The key interest rate was lowered by 75 basis points on March 26 and by 50 basis points on March 16, after it was hiked by a quarter-point in February.

The Lombard rate was cut to 1 percent, while the discount rate was left unchanged at 0.05 percent.

Two members who voted against the latest rate cut sought a 50 basis points reduction.
The central bank also presented the latest set of macroeconomic forecasts for the Czech economy that projected a severe contraction this year.

Gross domestic product is forecast to fall 8 percent this year and recover with 4 percent growth next year.

The monetary-policy relevant inflation is forecast at 1.8 percent in the second quarter of 2021 and at 2 percent in the third quarter. The CNB targets 2 percent inflation.

"The Bank Board assessed the risks to the forecast in the current extraordinary situation as being unprecedentedly high and requiring an even greater easing of the monetary conditions compared with the baseline scenario of the forecast," the bank said in a statement.

"In the current situation, the risks are naturally connected with the course of the pandemic and especially with the duration and size of the impacts of the quarantine measures on the global and Czech economy."

"Economic activity will not return to the pre-pandemic level before the end of next year" mainly due to weak fixed investment, the bank added.

Though the CNB does not see an immediate need to intervene in the financial market, the central bank announced two liquidity- providing measures as precautionary efforts.
The central bank unveiled a liquidity-providing instrument for some non-bank entities who will newly be able to obtain liquid funds in the form of short-term secured loans from the CNB.

The CNB said it is also working on a liquidity-providing instrument for credit institutions - banks, foreign bank branches and credit unions. The bank said it plans to broaden the range of collateral used in existing liquidity-providing operations to include mortgage bonds.

Further, the bank will launch liquidity-providing operations with three-month maturity for credit institutions.

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