Czechs Set to Cut Rates But Keep Hawkish Tone

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(Bloomberg) — Czech policymakers will probably cut interest rates again after inflation slowed more than expected, but they may also signal a lengthy pause is now in store due to persistent price risks.

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The central bank in Prague will lower the benchmark rate by a quarter of a percentage point to 3.5% at a meeting on Wednesday, according to 20 out of 25 analysts in a Bloomberg survey. The remaining five economists predict no change.

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While several rate setters have said they will weigh another cut or a hold as options for the May 7 meeting, they have reiterated the need for a cautious approach to more easing. After rapid reductions in borrowing costs last year, officials switched to a stop-and-go mode — they paused in December, cut rates again in February and held them in March. 

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Wednesday’s deliberations follow preliminary data showing that April inflation eased to 1.8% from a year earlier, the slowest pace since 2018 and undershooting market expectations. Still, consumer price growth was influenced largely by volatile fuel and energy costs, while services prices remained elevated.

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“Even a decline in the inflation rate below the 2% target doesn’t mean that the central bank will be easing monetary policy more radically,” said Martin Kron, an analyst at Raiffeisenbank AS in Prague. “Governor Ales Michl has said that even 1% inflation is all right, and that, on the contrary, core inflation exceeding 2% requires tight, hawkish policy.”

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Some board members have indicated that the next rate cut could be the final easing move in the current cycle. The main cause of concern is the persistent growth in cost of services, increasing wages, rising home prices and the budget deficit. 

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Raiffeisenbank is in the majority predicting a cut on Wednesday, and then sees borrowing costs remaining stable for a longer period of time.   

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The Czech Republic has shown mixed signals this year, with inflation influenced by volatile food and fuel costs, as well as a rebounding property market. Household consumption is recovering after the worse cost-of-living crisis in three decades, but investments are lagging.

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