The Czech Republic will most likely keep borrowing costs at the highest level in two decades as investors await signals on a timeline for rate cuts, which may come as early as this year.
(Bloomberg) — The Czech Republic will most likely keep borrowing costs at the highest level in two decades as investors await signals on a timeline for rate cuts, which may come as early as this year.
All 21 economists polled by Bloomberg expect the key interest rate to remain at 7% for a 10th consecutive meeting on Wednesday. The Czech National Bank’s forecast implies rapid cuts beginning in the third quarter even as board members have all but ruled out a cut this month.
Central bankers in Prague are weighing up a stagnant economy and inflation that’s set to slow to the 2% target early next year against potential price pressures from one of the lowest jobless rates in the European Union and a weaker-than-expected exchange rate for the koruna.
While the bank has stopped short of laying out concrete guidance for a shift, board members have signaled their preference for a longer period of tight policy and stressed that any easing will be slow and gradual.
Apart from the tight labor market, the koruna’s depreciation — it’s down 4.9% against the euro since mid-April — and rising oil prices present arguments for a cautious approach, Vice Governor Jan Frait said in an interview last week. He added that a rate cut can’t be ruled out in November or December if the board has “a high degree of faith in the forecast and the disinflationary trends.”
Consumer-price growth eased to 8.5% in August, the slowest pace in 20 months, down from a peak of 18% a year ago. The inflation rate will rise temporarily due to statistical effects in October before falling sharply toward the target early next year, according to the central bank.
After rate setters pushed back against bets on large cuts, investors scaled back such wagers. Interbank prices now show expectations for about 50 basis points of policy easing this year.
Read more: Czech Central Banker Says 2023 Cut Possible But Caution Needed
While the bank will probably maintain a hawkish tone on Wednesday, the board may contemplate a rate cut in November when new projections are likely to show room for easing, according to Raiffeisenbank AS analysts Helena Horska and Vratislav Zamis.
“The bank board may start lowering rates before the end of the year, although probably at a slower pace than the new forecast would suggest,” they said.
–With assistance from Joel Rinneby.
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