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(Bloomberg) — Czech policymakers are poised to keep interest rates on hold as inflation running below target provides a cushion against the immediate impact of surging oil costs.
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The central bank will keep the benchmark at 3.5% for a seventh meeting on Thursday, according to all analysts in a Bloomberg survey. Before the war in Iran erupted, officials had discussed potential cuts after headline price growth eased to the slowest pace in about a decade, but the Middle East turmoil pushed market expectations in the other direction.
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With the conflict sparking an unprecedented disruption in world oil supplies, and geopolitical risks rising, central bankers will probably emphasize rate stability and a wait-and-see strategy, according to Jan Bures, chief economist at KBC Group NV’s Czech lender CSOB AS.
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“Alternative scenarios, including rate hikes, are not currently being considered,” he said. “The window for such moves will only open in the second half of the year if the energy shock proves to be prolonged and severe.”
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As in many other emerging and developed markets, investors quickly reversed bets on the Czech Republic’s policy path following the start of the war. Market prices are now showing expectations of rate hikes in the coming months, with as many as two quarter-point increases factored in within the next 12 months.
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Still, board member Jan Kubicek, who has in the past expressed more hawkish views than most of his colleagues in Prague, said last week that he considered such a market move to be overdone.
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The headline inflation rate is significantly below the core gauge, which represents a “relatively large buffer” to absorb the oil shock and overall price growth should stay “comfortably inside the target range” of 1%-3%, the central banker said.
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Another board member, Jakub Seidler, was quoted by Reuters last week as saying that the bar for rates hikes is “very high,” while Deputy Governor Jan Frait urged a calm approach to the current global turmoil.
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“A sharp rise in energy prices may temporarily increase inflation, but at the same time it can also trigger a global recession,” Frait said a week ago. “That’s why it’s necessary to keep cool heads in setting interest rates.”
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—With assistance from Michal Kubala.
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