The Czech central bank will probably dash investors’ expectations for rapid monetary easing starting this fall, one of the board’s newest members said. The koruna gained.
(Bloomberg) — The Czech central bank will probably dash investors’ expectations for rapid monetary easing starting this fall, one of the board’s newest members said. The koruna gained.
A persistently tight domestic labor market, combined with expected further tightening in the US and the euro area, mean the Czech National Bank will probably keep the key rate at 7% for longer, Jan Prochazka said. Money-market prices imply at least 100 basis points of cuts this year, starting in September.
“Those market expectations are too optimistic,” he said in an interview on Tuesday. “I personally can’t imagine that we will reach consensus to start cutting rates this year, unless some new and significant risks for the economy emerge.”
The koruna gained as much as 0.5% to the euro and money-market rates jumped following Prochazka’s comments, which were later partly echoed by Vice Governors Jan Frait and Eva Zamrazilova.
While the European Central Bank and the US Federal Reserve are weighing further rate hikes, the Czechs are turning their focus to the timing and pace of future monetary easing. The central European nation has held borrowing costs unchanged for the past year after raising them by a cumulative 675 basis points.
Czech consumer price growth slowed in June more than the central bank expected, and the monetary authority forecasts it will reach its 2% goal by mid-2024. But several policymakers have warned about rapid wage growth, fueled by a shortage of workers, saying that inflation might prove to be more resilient after running above the target for over four years.
Read more: Czech Inflation Slows Below 10% as Focus Shifts to Rate Cuts
Also on Tuesday, Frait told Reuters that borrowing costs will probably decline more slowly than investors expect, although he said the debate about policy easing could begin as soon as this fall. Zamrazilova tweeted that market bets on rate cuts are “excessive.”
According to Prochazka, the risk that the central bank might fail to bring inflation down to its goal is “much more troubling” for rate setters and the economy than the possibility of price growth slowing to less than 2%.
“The debate about potential rate cuts might begin in November, but I expect it won’t get majority support until next year,” he said. “Most board members, I believe, will be looking for a really high degree of certainty that the target will be reached in time before they are ready to start with monetary easing.”
The 44-year old economist joined the central bank in February after serving as the head of EGAP, the state-owned provider of credit insurance for Czech exporters and businesses investing abroad. Last month, he voted with the majority of the board to hold rates, after unsuccessfully seeking a rate increase in May.
The next policy meeting is on Aug. 3, when the seven-member panel will also review fresh staff forecasts.
“Next week we will be deciding between a rate increase and stability,” said Prochazka. “A hike is not a very likely scenario, but I can’t entirely rule that out.”
(Updates with comments about November meeting in ninth paragraph.)
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