Czechs Push Back Against Rate Cut Bets Despite Slowing Inflation

Peter Laca and Krystof Chamonikolas
·2 min read

(Bloomberg) -- The Czech central bank stepped up its effort to temper investor expectations for an early start to interest-rate cuts, saying borrowing costs will remain high despite slowing inflation.

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Policymakers held the key interest rate at 7% on Wednesday, keeping it steady for a year as the European Union member state weathered the worst cost-of-living crisis in three decades. The bank also reaffirmed its commitment to prevent excessive currency swings, which is considered to be a backstop against major koruna depreciation.

The Czech deliberations pit depressed household consumption and slowing loan growth against the potential threat to inflation from the EU’s lowest unemployment and widening fiscal deficit. Governor Ales Michl said domestic and foreign price pressures are weakening, but added that the board will again decide at the next meeting whether to hold rates or raise them.

“Overall and core inflation are still at unacceptable levels,” Michl said. “The bank board is determined to continue in the fight against inflation until it’s fully under control, that means stabilized near the 2% target.”

The $300 billion economy stagnated in the first quarter after a short and mild recession. The central bank sees the inflation rate dropping to single digits this summer from 11.1% in May and returning to the 2% goal by around the middle of next year.

Wednesday’s vote was less tight than at the previous meeting, with two board members who sought a quarter-point increase being outvoted by five policymakers.

The bank has been trying to steer market views about the timing of monetary easing, with Michl saying the board expects a higher rate path than implied by the baseline forecast. Prior to the meeting, money-market prices indicated about 100 basis points of rate cuts this year, starting in September.

“The bank board expects interest rates to stay at the current level or higher for a longer period of time,” Michl says. “In my view, market expectations won’t materialize.”

Michl’s “hawkish message,” may trigger some upward correction in Czech market rates in the near term, which could be amplified by signals from the US Federal Reserve about the need to raise borrowing costs further, according to Marek Drimal, a strategist at Societe Generale in London.

“But the path to Czech rate cuts later this year remains open,” Drimal said. “The board will probably turn more dovish in August, and deliver the first rate cut in September.”

--With assistance from Deana Kjuka.

(Updates throughout with central bank comments.)

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