MNI CNB WATCH: Cut Pace Slows To 25Bps, Price Pressures Remain

MNI (LONDON) - The Czech National Bank lowered interest rates by 25bps Thursday, but while 2% price stability has been restored and the risk outlook is balanced, future cuts will nevertheless be approached with “great caution” due to persistent price pressures. (See MNI EM CNB WATCH: Fine-Tuning Set To Start, But 50Bps 'In Play')

The move -- which follows a 50bps cut in June -- leaves the key two-week rep rate at 4.50%, a decision the Bank Board said was underpinned by a new macroeconomic forecast implying a “modest decline” in short-term market interest rates.

Inflation is expected to fluctuate close to 2% in the months ahead before rising temporarily toward the end of the year due to base effects, a statement said, averaging 2.2% for the year. Inflation will then average 2% next year. Core inflation is seen averaging 2.5% in 2024 and 2.3% in 2024.

POLICY TIGHT

Monetary policy remains “tight”, but some inflationary pressures persist -- notably public and private sector wage demands, the possibility of “excessive” growth in public spending, higher-than-expected inertia in services inflation and a halt in tradables disinflation.

“The Bank Board considers it necessary to persist with tight monetary policy and carefully consider any further rate cuts, approaching them with great caution," the statement said.

Future rate decisions will be based on an assessment of fresh data, in particular the likely persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy,  labour market developments, the evolution of domestic and external demand, “and the actions of key foreign central banks.” (See MNI EM INTERVIEW: CNB Leaning Towards 50BP Cut - Ex-Governor Singer)

GDP is expected to grow by 1.2% this year and 2.8% in 2025. Overall, the Czech economy is still below potential, the Board noted, citing weak domestic and external demand, and "subdued" household and corporate confidence levels.