MNI WATCH: CNB Seen Cutting 50Bps to 5.25%, Signal Slower Pace

The Czech National Bank is set to cut the two-week repo rate, its key reference rate, by 50bps to 5.25% Thursday, with inflation at the bank’s 2% target, although with services price pressures remaining sticky it may signal a slowdown in the pace of easing in the coming months.

The CNB lowered interest rates by half a point in March, and, as Bank Board member Tomas Holub recently said policymakers will likely feel there is “no new argument to accelerate the pace. The new (arguments) are rather for a more cautious approach.” (See MNI CNB WATCH: Czech Cenbank Points To "Modest" Upside Risks)

Holub’s colleague Jan Prochazka has said the likelihood of a quicker pace is now “almost zero,” though there are no strong signals that would prompt a slowdown either, with both men comfortable with market pricing of rate falling to 3.5- 4% over the course of the next 12 months.

NEW PROJECTIONS

Fresh macroeconomic projections will confirm that while GDP growth has been tepid in recent quarters, the outlook is for an improvement on the previous 0.6% forecast, helped by a pickup in real wages and consumer sentiment, albeit against a background of continued fiscal consolidation.

Inflationary pressures will also be underpinned by the continued weakness of the koruna, while market repricing of the timing and scale of Federal Reserve cuts this year has raised questions over policy expectations across the CESEE region, even as the European Central Bank prepared to lower interest rates in June.

A further macro update is scheduled in August, when, according to Holub, a “deeper debate” on the need to slow the pace of easing might be appropriate.

The CNB will also comment on the neutral real rate of interest. But Prochazka’s remark in an interview that r* should be seen as “academic concept rather than a target or terminal level for the current monetary-policy process" suggests CNB officials will decline to give a precise figure, while indicating that it has probably shifted higher since the start of the Covid pandemic, energy crisis and war in Ukraine.