The Czech National Bank (CNB), which earlier today cut its benchmark repo rate to a record low 0.05 percent, said it reduced the rate because inflation is expected to remain below the bank's target through the second quarter of 2014 and it expects to keep rates at this level for a long time.
In a statement, the CNB also cut its economic growth forecasts for next year and 2014.
"The rates will remain at this level over a longer horizon until inflation pressures increase significantly," the CNB said, adding five of its board members voted in favor of the rate cut while two members voted to keep interest rates unchanged.
In the fourth quarter of 2013 consumer prices are forecast to rise by 2.3 percent, due to tax changes but monetary-policy relevant inflation "will be in the lower half of the tolerance band over the whole forecast horizon," the bank said, adding:
"The domestic economy is curbing inflation."
The CNB forecast the Czech economy to contract by 0.9 percent this year, due to weak external demand and subdued domestic demand. In 2013, when external demand is expected to improve, the central bank forecast a 0.2 percent rise in Gross Domestic Product, down from its previous 0.8 percent forecast, and the rise by 1.9 percent in 2014, down from its previous 2.5 percent forecast.
The Czech Republic's GDP contracted by an annual 1.0 percent in the second quarter while inflation rose to 3.4 percent in September. The CNB targets inflation of 2.0 percent.