Key repo rate Actual: 0.75% Consensus: 0.75% The Czech National Bank decided to go on with accommodative policy and keeps interest rates on record low level. It was widely expected decision after recent CZK rally. CPI inflation keeps close to the 2% target and core inflation remains even lower. There are some risks, mainly food and commodity prices, but despite them the deviation of CPI from the target is likely to stay within the band tolerated by the central bank (+-1%). Output gap diminished last year but still remains approx. 1% of GDP, wide enough to go on with current policy setting for the time being. Recent economic data suggest that the recovery gets momentum and GDP growth in 2010 and 1H 20011 is likely to be higher than originally expected. Thus, the central bank can start raising rates sooner this year. Finally, monetary conditions tightened as CZK exchange rate gained 3.30 against EUR and 5.6% against USD. Bank board votes 4-3 for stable rates with three dissenting votes for hiking rates by 25 bps. Governor Singer expressed the same view about the growth and warned against rising commodity prices. On the other hand, he mentioned anti-inflationary impact of the currency strengthening. It seems that the bank board is divided into two groups. One believing in the official CNB’s forecast and implied trajectory of interest rates and the second being afraid of low rates and their impact on the financial stability and short-term external inflationary forces. This division increases opacity of the monetary policy and it makes difficult to comprehend intensions of the central bank. The first rate hike can come in 3Q or 2Q (in case of CZK correction and positive macro data).