MNI CNB WATCH: Czech Rates Seen On Hold Until At Least August

The Czech National Bank is expected to leave interest rates untouched when it meets this week, with sticky core inflation putting off discussions over whether the easing has concluded until at least August.

CNB Bank Board members voted to cut the key two-week (2W) repo rate by 25bps to 3.5% last month, as inflation fell to 1.8% in April. But May’s 2.4% print - 0.1% below the CNB’s projected annual average - suggests that upwards pressure, notably in services, remains.

In a recent interview, board member Jan Prochazka said “this easing phase is over”, though further light easing might be “bearable” following an important meeting in the summer. (See MNI EM INTERVIEW: CNB Holds In June, Cuts In Sept - Ex-Gov Singer)

“Let's be clear that there is not much room, so the final level could be 3.25%," he said. "At the same time, with rates closer to 3%, I would feel comfortable raising them again should fresh or stronger inflationary pressures emerge."

Fellow Board member Jan Kubícek - who voted against May’s rate reduction - was more hawkish, arguing that any room for cuts had been exhausted.

“Unless some external circumstances emerge and cause a major decline in domestic demand, I don’t see the need to stimulate the economy further with monetary policy,” he said. “This is a bit of a warning sign for me that the disinflation process has stopped, or even reversed, in the core segment.”

Kubicek added that the property market had been growing at an “unsustainable” pace, with recent double-digit price increases reminiscent of previous bubbles.

He and Prochazka - along with board members Eva Zamrazilová and Jakub Seidler - argued that adjusting income-based ratios (DSTI and DTI) on property related lending is too blunt a tool in the current environment, and may lead to unwanted side effects.