CORRECTED-MNI INTERVIEW: CNB To Cut 25bps-Singer
(Corrects headline)
The Czech National Bank will cut rates by 25 basis points to 4.25% at its meeting on Wednesday and may signal willingness to consider either a larger move or a series of quarter-point cuts to take the two-week repo rate to 3.75% by the end of the year, former governor Miroslav Singer told MNI.
With inflation currently at 2.2% and forecast at 2.0% in 2025 and 2026, recent speeches by Board members indicate “overwhelming” support for a 0.25% September cut to key interest rates, Singer said.
Services inflation remains elevated but producer prices are under control, while even this month’s flooding is unlikely to throw the economy off track, Singer said.
Company profits show signs of softening - an indication that firms are prepared to absorb strong wage increases - but are expected to hold up. State sector wage increases are unlikely to lead to an increase in overall inflationary pressures, Singer said, speaking as Czechs went to the polls in regional elections
“It’s very clear that the only real worry is around wage growth; especially at a time when the global economy is slowing. There is therefore simply more room for accommodation. Even more hawkish Board members have said that if everything goes according to plan they see space for a series of smaller cuts which would lead us to 3.75% by the end of the year. That seems about right to me.”
Singer said he would not be surprised if the economy allows a faster relaxation of monetary policy in the months ahead.
“Of course it also depends very much on exchange rate developments, which will drive some Board members’ decision-making,” he said. “At the same time, we see the same situation everywhere, including in the eurozone. So we may see the differential narrowing thanks to what ECB does, or remaining similar to now.”
GERMANY ECONOMY A CONCERN
The CNB cut its policy rate by half a point in June before slowing to a quarter-point in August. (See MNI EM INTERVIEW: CNB Leaning Towards 50BP Cut - Ex-Governor Singer)
“The consensus will form around 25bp,” Singer said. “If there is a discussion about a larger cut, and there may be, it will be more around whether and how to indicate that they might do this at the next meeting.”
Consumer sentiment is not particularly negative, with the country at almost full employment and lots of households sitting on large savings, he said.
“What layoffs there have been have not so far been materially important. It may come to that, but we are not there yet.”
Currency risks are currently negligible, while anti-inflationary factors are becoming more prominent, Singer said. In particular, the poor state of Germany’s industrial and auto manufacturing sectors, with which the Czech Republic is closely tied, is “worrisome,” he said.
“It's not only Volkswagen, but Volkswagen is important, and Volkswagen in particular looks not being in a good shape,” he said.
CNB Board member Jan Kubicek has come out in favour of a 25bp cut in September, and Tomas Holub - who leaves the Board in November - said he was yet to decide between 25bps and 50bps, but that he expects a consensus to form around the former and that the 2W repo rate should end the year at 4.0-4.5%. Jan Frait refused to rule out a half-point cut before August’s meeting - when the pace of cuts slowed to 25bp, while vice-governor Eva Zamrazilova said last week that she saw no reason not to keep cutting.