Monetary policy instruments

Interest rates are the CNB’s main monetary policy instrument. The Bank Board decides on their levels at its regular meetings. The rates for the period ahead are announced on the CNB website immediately after each meeting. The settings of central bank interest rates are reflected in market interest rates and economic variables such as the exchange rate, consumption and investment expenditure, savings, production volumes, prices of goods and services, and asset prices. Various forms of market inertia mean that a change in interest rates has its strongest effect on inflation with a lag of more than a year. A rate increase lowers inflation and a rate decrease conversely increases inflation.

Two-week repo rate

The CNB’s key interest rate is the two-week (2W) repo rate. The central bank uses it as the upper-limit interest rate on its repo operations, through which it steers short-term market interest rates. Owing to a long-standing liquidity surplus in the Czech economy, the CNB absorbs liquidity in its repo operations and provides banks with securities as collateral. When the transaction is arranged, the two parties conclude a repurchase agreement, which means that at maturity the CNB repays the principal of the loan plus interest and the creditor bank returns the collateral to the CNB.

The CNB usually performs repo operations three times a week as variable rate tenders. The declared 2W repo rate serves as the maximum rate at which banks’ bids can be satisfied in the tender. The bids are ranked using the American auction procedure, in which the CNB satisfies those with the lowest interest rate as having priority, until the total predicted liquidity surplus for the day is exhausted. The basic duration of these operations is 14 days.

Lombard and discount rate

Besides the repo rate, the CNB declares a Lombard rate and a discount rate. Commercial banks may borrow overnight liquidity from the CNB at the Lombard rate and against collateral provided under the lending facility. Conversely, they deposit overnight liquidity with the central bank at the discount rate under the deposit facility.

Current monetary policy rates

Name Rate Valid since
2W repo rate 3.75% 23 December 2021
Discount rate 2.75% 23 December 2021
Lombard rate 4.75% 23 December 2021

Other monetary policy instruments

The central bank also has other instruments besides interest rates at its disposal. However, it only uses them in specific situations where rates reach the “effective lower bound” and the economy requires a more pronounced monetary policy easing. The CNB was in such a situation in 2013, when it announced an exchange rate commitment which then lasted until 2017 (more on the exchange rate commitment).