MNI CNB WATCH: Rate Hold Expected Despite Slower Inflation

The Czech National Bank is generally expected to leave the 2W repo rate at 3.5% on Wednesday, as price risks persist despite the recent fall in headline inflation. (See MNI EM CNB WATCH: Rates Held As Growth, Price Projections Raised)

Wages, rents, real estate prices and sticky core inflation could keep price pressures elevated in the opinions of CNB policymakers and staff, with recent comments suggesting that while a hike is still some way from entering the discussion, rates currently look more likely to go up than down.

Annual headline inflation fell from 2.7% in July to 2.5% in August - 0.2% lower than the CNB expected - helped by declining prices in several volatile items - against a target of 2%, and a projected year-end average of 2.6%.

However, core inflation edged up 0.1% to 2.8%, indicating that overall price developments in the domestic economy “have not yet fully stabilised and require tight monetary conditions,” Executive Director of the Monetary Department Petr Sklenar wrote.

Bank Board member Jan Kubicek said in an interview that rates should remain at their current level for some months, with a rate hike not currently on the table despite upside risks arising from rapid wage growth and an uncertain fiscal policy outlook.

 “I think the likelihood is higher that the next move will be upwards, but I do not know when,” he said. The koruna's exchange rate is “doing the policy restriction work for us a little bit.” 

The combination of exchange rate strength and interest rates means monetary conditions are now at a neutral setting, Jan Frait said, adding that while he did not see "any strong reason why we should disrupt this equilibrium with more rate cuts, right now, I’m not thinking about increasing interest rates.”

House price rises in particular preclude cutting rates further, although further hikes “would achieve very little at a very high cost,”  Deputy Governor Eva Zamrazilova said in July. Nevertheless, the easing cycle is “almost certainly finished,” she said. “It’s about nothing else than domestic demand.”

With Governor Ales Michl also known to favour a cautious approach - while also stressing the risks to inflation of looser fiscal policy - this week’s decision looks likely to be an easy one.