Czechs Hold Rates as Election Outcome Adds to Inflation Concerns

ksv}{v7ze4[3gehfa]8chhp1_media_dl_1.png Czech Statistics Office

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(Bloomberg) — Czech policymakers kept interest rates unchanged for a fourth straight meeting as uncertainty over the next government’s budget plans compounds inflation worries.

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The central bank left the benchmark rate at 3.5% on Thursday, as expected by all analysts surveyed by Bloomberg. Policymakers are sticking to a more cautious approach after they slashed official borrowing costs by half during an easing cycle that started in late 2023.

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It was the central bank’s first decision since the populist ANO party of billionaire Andrej Babis won parliamentary elections last month. The party, which ran on a platform of more spending, has yet to present its fiscal plan as it moves closer to returning to government.

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Governor Ales Michl is scheduled to hold a news conference at 3 p.m., where he’ll also present the highlights of the bank’s quarterly economic forecasts.

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Consumer price growth unexpectedly accelerated last month, boosted mainly by food costs, a preliminary reading showed on Wednesday. While headline inflation hovers safely within the official tolerance range, the closely-watched services gauge remained elevated at 4.6%. 

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While ANO has pledged to keep the broad public finance gap within the European Union’s limit of 3% of economic output, it’s also planning to deliver on a range of campaign promises such as more spending on pensions, investments and public wages.

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Some of the planned steps may help curb inflation at first, such as measures designed to lower energy prices, according to Dominik Rusinko, chief economist at KBC Group NV’s Patria Finance brokerage in Prague.

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“But financing of this step, and many others, will be through debt, and therefore via a bigger deficit of public finances with a pro-inflationary impact,” he said in a report this week.

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The decision underscored divergence with neighboring Poland, which cut rates for the fifth time this year the previous day. While Czech export-oriented industries face risks of weaker demand from the key German market, central bankers have expressed concerns over persistent domestic price pressures fueled by household spending on services.

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Their cautious stance has helped the koruna stage one of the best rallies among emerging-market currencies this year, both against the euro and the dollar.

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—With assistance from Andrea Dudik.

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