MNI INTERVIEW: Czech National Bank Seen Holding This Month
MNI (LONDON) - The Czech National Bank will hold in March and next cut rates at its meeting in May, the chief economist at the Czech Banking Association told MNI, but upside risks from energy prices, services, mortgages, wages and defence spending mean caution is still warranted.
The CNB's Bank Board voted unanimously to lower the key two-week repo rate by 0.25 percentage point to 3.75% last month - the first rate-setting meeting of the year - and attributed January’s upside inflation surprise of 2.8% largely to accelerating food prices. (See MNI EM CNB WATCH: 25BP Cut To 3.75%, Highlights Risks)
Corrections over coming months should leave the forecast for annual inflation unchanged at around 2.4%, said Jaromir Sindel, allowing the CNB to cut to 3.25% this year and 3.0% in 2026.
However core CPI - 2.5% in January - will be crucial to the timing and the level of cuts, with a low in rates of 3.5% possible this year and upside risk also in 2026, Sindel said in an interview.
“Unless we see some larger disinflationary surprises coming from the core CPI - or some strong currency appreciation because of the unchanged rate - I would expect the next cut in the CNB’s policy rate to be in May.”
TARIFF IMPACT
Tradeable core CPI has been close to zero in recent months. Should U.S. tariffs become disinflationary for Europe - due to more Chinese goods being imported, while also having a negative impact on eurozone and Czech economic growth, a disinflationary trend could remain, he said.
Yet labour markets may not ease sufficiently in coming quarters to reduce inflationary pressures from the services sector, Sindel said, with wage growth - 7% in 2024 Q3 - remaining strong.
“To keep the economic recovery on track it is important for service sector employment to keep absorbing falling employment from industrial sectors. This is likely to remain the case unless we see a larger negative shock in industrial economic activity.”
Imputed rents have accelerated as the Czech housing market and associated lending continue their recovery, as recently highlighted by Governor Ales Michl, Sindel said.
“Credit creation related to the property market is an important story. Real estate prices accelerated by 11% in 2024 after some decrease in the previous two years. This has consequences for the Czech National Bank, because almost 15% of the CPI’s consumer basket - and around double for core CPI - comes down to actual and imputed rents, which are influenced to some extent by real estate prices.”
Corporate loan demand is also trending up, albeit trimmed by expectations of a higher CNB terminal rate, he said, adding that geopolitical uncertainty, structural and energy challenges in European industry will prevent any significant near easing of credit standards.
FISCAL POLICY
Michl has been cautious in his assessment of how much fiscal policy drives CPI, while noting 2024’s fiscal consolidation was disinflationary, Sindler said. But officials may be concerned by fiscal loosening around autumn’s parliamentary elections - including the extension of some price subsidies - coupled with a likely boost to defence spending.
“If we consider that we have just increased it to 2% of GDP, and there will be probably some requirement to increase it by a further one percentage point, unless that is offset on the expenditure side the government will simply spend more by one percentage point. And if it's financed again by debt, it will increase money creation in the economy.”
A lasting ceasefire in Ukraine could also have an inflationary impact on the Czech labour market were a large number of refugees to return, Sindel said.
Asked about the CNB’s holding Bitcoin as a reserve asset - a proposition currently being assessed - Sindel said that while CBA members do not have a strong view on whether the central bank should or should not do so, they were unlikely to follow suit.
“I don't think that Czech banks are about to change their attitude to Bitcoin or other cryptocurrencies, which still have issues related to money laundering, fraud and cyber security that are crucial for ensuring the security of their clients.”