MNI CNB WATCH: 50bp Cut Seen As Bank Opts For Caution
Czech inflation is back to target, but recent remarks by policymakers suggest conservative approach to be maintained
The Czech National Bank is expected to cut its repo rate by 50 basis points to 5.75% on Wednesday, as it follows a conservative approach to lowering rates despite recent downside surprises to price pressures and growth worries. (See MNI INTERVIEW: Weak Germany To Hit Czech Growth "For Years")
CPI inflation fell from 6.9% in December 2023 to 2.3% in January and 2.0% in February, with core at 2.8% Czech Statistical Office figures show. However governor Ales Michl indicated in February that the bank would be careful as it lowers rates, citing the weakening koruna and the public finance deficits as risks. (See MNI INTERVIEW: Czech Rates Too High- Ex-Deputy Governor)
“These are arguments for lowering interest rates cautiously and for being able to halt the rate reduction process at any time,” he said.
Ales’s sentiments were echoed more recently in remarks by Bank Board members Eva Zamrazilova - who said the choice was between a cut of 25 or 50bp - and Jan Kubícek, who was in favour of a half-point rate reduction.
"We are leading a debate about the vigour of interest rate cuts, whether to choose the trajectory of a fast decline and then remaining somewhere close to the equilibrium level, or whether to reach the equilibrium gradually," Kubicek said.
"The exchange rate development rather leads me towards preference for us choosing the second way, to lower rates gradually, which can mean lowering by 50 basis points at a time."
The koruna has stabilised in recent weeks, but references to lingering service sector price pressures and changed Fed and ECB rate expectations mean a second successive 50bp cut is now the baseline, with fresh inflation projections due in May.