The Czech Republic is likely to keep borrowing costs unchanged as investors look for signals about the timing and pace of interest-rate cuts that may start once inflation eases below 10%.
(Bloomberg) — The Czech Republic is likely to keep borrowing costs unchanged as investors look for signals about the timing and pace of interest-rate cuts that may start once inflation eases below 10%.
The central bank will hold the benchmark rate at 7% on Wednesday, where it’s been since new leadership halted rapid hikes last summer, according to all analysts in a Bloomberg survey. Policy makers will also probably uphold a commitment to prevent major currency swings, which has helped the koruna outperform its regional peers in the past year.
Most Czech central bankers consider current monetary policy tight enough, saying that declining household consumption and a cooling property market are signs that home-grown price pressures are easing. They also argue that a further rate increase would disproportionately hurt local companies that can’t get cheaper loans in euros.
The bank will announce the rate decision at 2:30 p.m. in Prague, followed by a news conference by Governor Ales Michl an hour and 15 minutes later.
The board “clearly prefers” cooling inflation via a stronger currency rather than raising rates further, according to Helena Horska, chief economist at Raiffeisenbank in Prague, who expects policy easing to start in the third quarter if inflation slows as the central bank predicts.
“It’s now too late to hike, and the only question is when the central bank will start cutting rates, and how fast,” she said.
Czech inflation eased in February, to 16.7%, and the central bank expects it to slow to below 10% in the second half of the year. The bank’s latest projection sees price growth retreating to the 2% target by the middle of next year.
Still, some board members see an overheating labor market as a potential inflation risk and have warned that more tightening may come if salaries jump too much and threaten to cause a wage-price spiral.
Money-market prices show zero likelihood of borrowing costs rising further, and indicate wagers on at least 100 basis points of cuts this year, starting this summer.
Since the leadership overhaul, a majority of board members has preferred to smooth out the interest rate path instead of following staff forecasts implying more sharp rate hikes and then rapid cuts just months later. One board dissenter, Tomas Holub, advocates higher rates because he sees risks that inflation will become entrenched.
Deputy Governor Eva Zamrazilova said last week that the stronger koruna is also helping tighten monetary conditions by curbing the profitability of large exporters, which are able to secure cheaper financing in euros.
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