Czechs to Cut Rates as Risks Cloud Path Ahead: Decision Guide

Czech policymakers will likely press on with an eighth consecutive interest-rate cut as weak economic growth for now trumps concerns about inflationary risks.

(Bloomberg) — Czech policymakers will likely press on with an eighth consecutive interest-rate cut as weak economic growth for now trumps concerns about inflationary risks.

The central bank needs to weigh a sluggish recovery from the pandemic and the energy crisis against accelerating price growth in the European Union nation. While inflation is now driven by volatile food prices and temporary effects, rising costs for services and a rebounding housing market may give rate setters grounds to consider a pause in easing.

All but one economist polled by Bloomberg expect the Czech National Bank to lower the benchmark by 25 basis points to 4% on Thursday, which would bring cumulative cuts to 3 percentage points since December. The sole outlier in the survey of 25 analysts predicted no change.

“We expect the CNB to continue lowering rates, albeit still only at a cautious pace,” said Martin Gurtler, an analyst at Komercni Banka AS in Prague. While officials continue to highlight persistent price pressures in services, “a strong counterforce to that is the weak economic performance,” he said in a report.

Money-market prices show that investors have scaled back bets on easing in the coming months after a higher-than-expected Czech inflation reading for September and an increase in US Treasury yields. Forward-rate agreements now indicate less than 50 basis points of cuts at the year’s last two policy meetings.

The koruna has been more resilient than its regional peers to swings in global sentiment toward riskier assets. Still, it has weakened about 1% to the euro since the previous policy meeting in September, reducing the scope for more aggressive rate cuts now.

The Czech currency initially slid 0.1% to the euro on Wednesday after Donald Trump’s victory in the US presidential election triggered a dollar rally and a selloff across emerging markets.

Czech policymakers will also discuss a quarterly update of staff forecasts. The new projections will likely show slower economic expansion for this year and next, while the outlook for inflation path may be revised upward, according to ING Groep NV. 

“For us, the main challenge for this meeting is to get a sense of how sensitive the CNB is to further potential upside surprises in headline inflation,” ING’s Frantisek Taborsky and David Havrlant said in a note. “We will see more upside inflation surprises between the November and December meetings, leading the central bank to pause in December.”