What more can the Czech National Bank do?

The Czech National Bank (CNB) struck a dovish note at last week’s MPC meeting and is clearly concerned about the threat of deflation. For now, we suspect that the Bank is unlikely to take further action to ease policy. But there is a real risk that inflation surprises on the downside, prompting the MPC to loosen monetary conditions. With interest rates already at the zero bound, in the first instance we think policymakers would weaken the currency further on the foreign exchange market. If more aggressive easing is required, they might also cap the Bank’s sterilisation operations.