MNI CNB WATCH: Hawkish Cut As CPI Dips, Core Still Sticky

April’s fall in inflation means the Czech National Bank is likely to cut key interest rates by 25 basis points, but with upside risks to the outlook, communication will remain hawkish. (See MNI EM CNB WATCH: Rates Held As Inflation Outlook Strengthens)

CPI inflation fell from 2.7% in March to a below-target 1.8% in April, according to flash estimates published Tuesday, raising the chances that on Wednesday the CNB’s Bank Board will lower the 2W Repo rate to 3.5% - the upper end of members’ assessment of where the neutral rate of interest lies - after standing pat in March. (See MNI EM INTERVIEW: More Room For Czech Rate Cuts - Ex-CNB Official)

Core inflation held steady at 2.5% in March, the same level as seen in each of the previous two months, with the CNB assuming in February that it will remain somewhat above the 2% target for the remainder of the year.

The publication this month of fresh macroeconomic projections will be an important signal for how far and how fast the Bank can afford to ease, bearing in mind Governor Ales Michl’s belief that “core inflation above two is a risk and requires strict hawkish policy.”

That the CNB is very much in fine-tuning mode was made clear in a recent interview with Deputy Governor Eva Zamrazilova, who said that while she might be prepared to ease in May, “it can’t be ruled out that it will be the last one in this cycle.”

Property prices and imputed rents continue to rise at a faster pace than previously expected, she said, and while trade tariffs are likely to curb global demand, their longer-run impact may be inflationary.

With growth subdued, Zamrazilova’s view that monetary policy should not be overly restrictive in order that the economy can “breathe a little easier,” is likely to be shared.

Her comments followed Michl’s assertion that the CNB will lower rates “very carefully.” Market expectations of a 3% terminal rate within the next 12 months may be “overly optimistic,” she said.