MNI CNB WATCH: Czech Rate Hold Seen As Price Pressures Persist

The Czech National Bank is likely to leave interest rates on hold this week, in line with recent remarks by Bank Board members, with inflationary pressure under control but very much still alive. (See MNI EM CNB WATCH: Czech Rates Held At 3.5%, Upside Risks Seen)

The CNB voted unanimously to keep policy rate at 3.50% in June, and stated that ongoing inflation pressures from the domestic economy “currently preclude a further decrease in interest rates" - a sentiment expressed earlier in the month by governor Ales Michl, who said that the 2W-repo rate will remain at its current level “for some time.”

Jan Kubicek, who voted against May's 25 basis points cut, said before the following month's decision that any room for cuts had been "exhausted," and that with core inflation seemingly stuck close to - or possibly above - 2.7%, there is no need for monetary policy to stimulate the economy further.

CUTS 'OVER'

More recently, deputy governor Eva Zamrazilova said that interest-rate cuts are “almost certainly” over. Another Board member, Jakob Seidler, took the view that services prices remain a "challenge," therefore the main rate will “stay stable for some time [...] Unless we see some unexpected developments, it is even possible that we are done.”

June’s 2.9% inflation print was just 0.1% above the level seen by the central bank in May, but still substantially above the 2% target, while second-quarter GDP growth was also up 0.1% at 2.4%. 

Whether or not the CNB’s Summer projections - also published this week - will deviate substantially from the Spring exercise, when inflation was projected to end the year at 2.5%, remains to be seen. 

On the one hand, imported inflation has been moderated by a stronger koruna, and interest rates remain tight in real terms. On the other, reduced global trade uncertainty, possible spillovers from German infrastructure and defence spending, rising rents, and reasonably tight labour market conditions - implying further wage growth and higher consumer spending - mean a small upward adjustment may be forthcoming. (See MNI EM INTERVIEW: CNB Holds In June, Cuts In Sept - Ex-Gov Singer)