Czechs Cut Rates as Trump Win Adds to Growth, Policy Risks

Czech policymakers delivered an eighth consecutive interest-rate cut as weak economic growth eclipsed concerns about inflationary risks.

(Bloomberg) — Czech policymakers delivered an eighth consecutive interest-rate cut as weak economic growth eclipsed concerns about inflationary risks.

The central bank in Prague lowered the benchmark rate by 25 basis points to 4% on Thursday, bringing the cumulative cuts in the last year to 3 percentage points. The outcome was in line with the forecasts of almost all economists in a Bloomberg survey; one predicted no change. 

The bank’s board weighed a sluggish recovery from the pandemic and the energy crisis against accelerating price growth. While inflation is now driven by volatile food prices and temporary effects, officials have pointed to rising costs for services and a rebounding housing market as reasons for cautious easing steps.

Investors’ attention will now turn to the central bank’s new staff forecast for clues about the future rate path. A weaker economic recovery at home and abroad, combined with an outlook for lower rates in the euro area are expected to point to continued easing in the coming meetings, according to Jan Bures, chief economist at brokerage Patria Finance.

Governor Ales Michl will comment on the decision and present the highlights of the new forecast at a briefing scheduled for 3:45 p.m.

Still, Donald Trump’s victory in the US presidential election and his plans for trade tariffs amplify risks for the Czech economy, which relies heavily on exports. That could further hurt economic growth, but also put pressure on the koruna if Trump’s plans stoke inflation and force the US Federal Reserve to keep more restrictive policy.

Several inflationary factors, such as prices for service, strong wage growth, expansionary fiscal policy and the potential new tariffs will probably prompt the central bank to maintain its cautious communication, Jiri Polansky, a Ceska Sporitelna AS analyst, said before the briefing.

“Looking ahead to future meetings, we still see heightened uncertainty, with the currently weaker koruna also playing a role,” he said.

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. Before Thursday’s decision, forward-rate agreements indicated less than 50 basis points of cuts by the end of this year.

The koruna has been more resilient than its regional peers to swings in global sentiment toward riskier assets. It rebounded from an initial slide following the results of the US election, trading 0.3% stronger to the euro as of 3 p.m. in Prague. The Czech currency is about 0.8% weaker against the euro since since the previous policy meeting in September. 

(Updates with analyst comments starting in seventh paragraph, market prices in 10th)