MNI CNB WATCH: More Easing, But Tight Policy Still Needed

MNI (LONDON) - The Czech National Bank will maintain a tight policy stance with upside inflation risks still evident, it said as after Wednesday’s 25 basis-point cut to leave the 2W repo rate at 4.25%. (See MNI EM CNB WATCH: 25bps Cut Seen As Fine-Tuning Continues)

Inflation has been stable close to the CNB’s 2% since early this year, but while above-expectation headline prints in July and August could be attributed to faster food price growth, higher-than-forecasted core inflation confirmed that a “cautious” approach to easing is appropriate, the Bank said in a statement.

Wage growth was strong in the Q2 2024, though wage-price spirals do not seem to be materialising. However, higher wage demands in the public and private sectors, “potential excessive growth” in government spending and a significant recovery in lending activity pose an inflationary risk, the Bank said.

Base effects mean inflation is seen rising towards the upper boundary of the tolerance band in Q4, before falling back and fluctuating close to target in 2025.

“Significant” downside inflation risks include weakening global economic activity - as reflected in the outlook for rate cuts by major central banks - and, in particular, weaker German economic output. Overall, risks are "broadly balanced," the Bank said.

The Bank Board reiterated that the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive as rates approach their neutral levels.

Six Bank Board members voted for a quarter-point cut and one for half a point. (See MNI EM INTERVIEW: CNB To Cut 25bps-Singer)