MNI INTERVIEW: CNB To Hold, Cut From February - Ex-Official
MNI (LONDON) - With inflation at the top end of the Czech National Bank’s tolerance band, policymakers are likely to hold interest rates this week before cutting at every meeting from February to leave key rates at 3.00% in June, a former senior official told MNI.
The Bank Board is likely to adopt a hawkish approach until inflation is rooted closer to the 2% target, Martin Guertler said in an interview ahead of Thursday’s meeting in which discussion will focus on whether to lower the 2W Repo Rate by 25bps to 3.75% or to stand pat. (See MNI EM INTERVIEW: Czech National Bank May Hold In Dec-Zamrazilova)
Nominal wage growth of 7% this year - higher than CNB expectations of 6.1% - coupled with volatile food prices, may push inflation to or above the 3% upper limit of the tolerance band in December, said Guertler, who served as senior economist in the CNB’s Monetary Department until 2020 and is now senior economist at Komercni Banka.
Services price growth continues to outpace that of goods, Guertler said, but is expected to moderate next year from 5% thanks to cheaper energy costs and subdued demand, with the economy seen growing by 0.8% this year and 1.5% next, while inflation will fall from 2.4-2.5% to 1.8%.
Both forecasts are below market consensus, which is for GDP growth and inflation to exceed 2% in 2025, Guertler said, with domestic and foreign demand weak.
DOWNSIDE RISKS
“What may hamper the decline in services inflation next year is a resurgence in house prices, which is likely to push up imputed and paid rents. While we expect this to keep core inflation slightly above 2% next year, it is unlikely to alter the disinflationary trend, which should also continue to be supported by muted goods price inflation. We do not expect goods prices to pick up significantly in 2025, given the global overcapacity in industry,” he said.
“We see downside risks to economic growth and inflation."
Inflation should return to 2.5% in January, allowing regular 25bp rate cuts from February before reaching the 3% neutral rate in June, Guertler said. The timing of the CNB’s first 2025 cut is made more likely by the Czech Statistical Office’s decision to publish preliminary monthly inflation estimates from Feb 6, the same day the Bank Board is due to meet, he added.
The CNB's Bank Board, led by Ales Michl, should maintain both its cautious approach to rate-setting and generally harmonious appearance throughout next year, Guertler said, with any potential disagreements - more likely to be over the terminal level of rates, which some members have placed at 4%, rather than the pace of easing – staying largely behind closed doors.
CAUTIOUS STANCE
“Board members have tended to emphasise a cautious stance on rate cuts. Dissenting voices have also been rather rare in the meeting minutes. But of course, as interest rates have come down and are now closer to the assumed neutral level, the degree of dissent may increase, although we do not expect it to be too visible from outside the bank,” he said.
Despite the CNB’s frequent complaints, expansionary fiscal policy should not prove a major obstacle to looser monetary policy, Guertler said - pointing out that while expected state budget deficits of CZK200-300 billion for this year and next are much higher than before the pandemic, so is the general price level.
In terms of nominal GDP, this translates into an effective narrowing of the budget deficit from -3.8% in 2023 to -2.6% in 2024 and further to -2.0% in 2025, falling below 2% later. Next year’s state budget is also likely to allocate a larger share to investment, which may reduce its impact on inflation.
“We expect the total debt-to-GDP ratio to stabilise at around 45% in the coming years, which should keep the Czech Republic among the least indebted countries in the EU,” Guertler said.