MNI CNB WATCH: Hawkish Cut As Easing Slowdown In View

The Czech National Bank cut interest rates by 50bps as expected on Thursday, but warned that "modest" inflationary risks ahead could lead to a divergence towards the upper bound of the tolerance band in quarters ahead. (See MNI EM WATCH: CNB Seen Cutting 50Bps to 5.25%, Signal Slower Pace)

Inflation, currently at 2%, will continue to decline, the bank said, but the interest rate path in the most recent model is "significantly higher" than in the winter forecast in this and subsequent quarters, "moving it closer to the levels communicated in previous months."

Average annual inflation is now projected to be 2.3% in 2024 and 2% in 2025 (seen at 2.6% and 2.0% respectively in Feb), with this year's core inflation at 2.6% (2.5%). The Czech economy is expected to will by 1.4% (0.6%) this year and 2.7% (2.4%) next year, supported by a gradual increase in household consumption.

The CNB expects household consumption, which is still below pre-Covid levels, to rise gradually.

The size of any future reduction in interest rates will depend principally on the inflation environment, exchange rate developments, fiscal policy's on the economy, the tightness in the labour market and the evolution of domestic and external demand, the bank said in its policy statement.

FED, ECB INFLUENCE

The actions of key foreign central banks will also be relevant to future action, the CNB said, adding that the interest rate reduction process can be "paused or terminated at any time at levels that are still restrictive if inflation – especially its core component – does not develop in line with the forecast."

Policymakers also discussed the nominal natural rate of interest, with a baseline scenario of the forecast still based on a rate of 3%, although some on the board consider it "highly likely that the natural rate of interest has risen slightly compared with the pre-Covid period".