MNI CNB WATCH: Fine-Tuning Set To Start, But 50Bps 'In Play'

MNI (LONDON) - Czech National Bank rate-setters will decide Thursday whether at-target inflation allows them to cut interest rates by 50bps, or if the threat of moderate upside risks to the price outlook warrant slowing the pace of easing to 25bps.

Five members of the Bank board voted in favour lowering the two-week repo rate by half a point to 4.75% in June, while two -- Eva Zamrazilova and Karina Kubelkova -- preferred the slower pace.

July’s discussion looks like being something a re-run, though it is notable that while Board member Jan Frait commented that a 50bps cut is “still in play” he also acknlowdged that the CNB is “approaching the point where fine-tuning begins." (See MNI EM WATCH: CNB Keeps 50Bp Easing Pace, Signals Easing Slowdown)

Frait’s colleague Jan Procházka -- who also backed 50bps in June -- was less equivocal in a recent interview. “Now we go into fine tuning mode,” he said, with a half-point cut in July “highly unlikely,” he added. “Indeed, the fine-tuning phase, which means standard quarter-percentage-point increments, is already occurring.

“The goal is not to quickly drop to the neutral rate, which is still somewhere around three percent for us, but rather to gradually get to the rate that we forecast will best match the state of the economy at the end of this rate-cutting cycle.”

INFLATION SLOWS

CPI inflation returned to 2% last month, while core inflation fell further than expected in June, to 2.2%. Czech consumer confidence dropped from 101.0 in June to 98.4 in July, the third monthly decline in a row, while business sentiment fell from 97.4 to 94.5 over the same period. 

External demand for Czech goods is still sluggish, with the pace of manufacturing growth also seen weakening in the coming months.

Yet while the Board believes that a neutral rate of interest of 3-3.5% means Czech interest rates are still well into restrictive territory, the demand effects of continued nominal wage  growth, high public deficits, volatile food prices and the exchange rate will be watched carefully.

Favourable conditions means the 2W repo rate will still end the year at or just below 4%. (See MNI EM INTERVIEW: CNB Leaning Towards 50BP Cut - Ex-Governor Singer)

But, as Prohazska, Zamrazilova, Governor Michl and even Frait have highlighted, the desire to proceed with caution will likely prove decisive unless or until fresh real data gives the CNB cause to rethink.