MNI CNB WATCH: Steer Means 25Bps Cut To 3.75% "Very Likely"
MNI (LONDON) - A softer CPI print will likely free the Czech National Bank to resume its easing cycle on Thursday, but a still-strong pace of service sector price growth means policymakers will sound a familiar note of caution over the depth and timing of further rate cuts. (See MNI EM CNBWATCH: Rate Held At 4.0%; Inflation Rise 'Temporary')
Governor Ales Michl said in an interview last week that a 25-basis-point cut in the key 2W Repo rate from 4% to 3.75% was “very likely,” echoing recent remarks by Bank Board members Jan Prochazka and the previously hawkish Eva Zamrazilova, who put the neutral rate of interest at between 3-4% and 3-3.5%, respectively. (See MNI EM INTERVIEW: Czech National Bank May Hold In Dec-Zamrazilova)
However, while December’s headline CPI rise was 0.3 percentage point below CNB expectations at 3.0%, and is seen declining further in January, elevated levels of services price growth continue to slow core inflation’s decline - a point highlighted in a recent interview with Deputy Governor Jan Frait.
With the policy rate currently around half a percentage point from where monetary policy would “start to act truly neutral or slightly supportive,” February’s meeting is an opportunity to discuss whether to hold steady or cut for the first time since December’s pause, Frait said.
Domestic consumption continues to improve, but subdued external demand - and in particular the weak state of Germany’s economy - remains a drag on growth and inflation. Nominal wage gains, rents and household loan growth could push prices the other way in the coming months.
Other two-sided risks include the as-yet-unknown impact of U.S. tariffs on EU goods, and volatile food and fuel prices - as reflected in Prochazka’s belief that beyond February the CNB will “have to go meeting-by-meeting and be very data-dependent.”
Flash estimates for January inflation will be released earlier the same day, with movement in line with expectation seen confirming a cut, and upside surprise potentially delaying one. Michl may also use the press conference to address questions over the CNB's decision to explore using central bank reserves to buy bitcoin. (See MNI EM INTERVIEW: CNB Bitcoin Buy Could Backfire - Ex-Governor)