MNI CNB WATCH: Core Inflation, Uncertainty Argue For Hold

The Czech National Bank is expected to leave key interest rates unchanged on Wednesday, with services price growth still a concern and the two-week repo rate already close to neutral.  (See MNI EM INTERVIEW: Czech National Bank Seen Holding This Month)

The CNB’s Bank Board voted unanimously to cut rates by 25 basis points to 3.75% last month, with short-term risks to inflation, set to average around 2.4% this year, yet to materialise and external demand still subdued.

However, core inflation remains a concern, with global uncertainty, higher German fiscal spending - especially on defence - improving growth figures and expectations-beating wage data for the end of last year pointing to May, when fresh projections are due, as the next cut date.

Speaking for the first time in an interview since joining the Board, Jakob Seidler argued recently that the balance of risks justifies leaving interest rates where they are, “which means maintaining some degree of policy restriction.”

Market expectations of around 50bps of cuts this year are “relatively fair,” Seidler said, noting also that other central banks have slowed the pace of easing. Jan Kubicek said he is also leaning towards a pause, seeing no reason why monetary policy “should be in expansionary mode now".

The CNB continues to benefit from government fiscal consolidation efforts, with proposed efforts to boost defence spending to 3% of GDP likely not seen as an inflation threat. But it is unlikely to depart from its customary cautious tone. (MNI EM INTERVIEW: Czech Defence Boost Means Cuts Elsewhere- Holub)