The Czech Republic kept borrowing costs unchanged as investors look for signals about the timing and pace of interest-rate cuts that may start once inflation eases below 10%.
(Bloomberg) — The Czech Republic kept borrowing costs unchanged as investors look for signals about the timing and pace of interest-rate cuts that may start once inflation eases below 10%.
The central bank held the benchmark rate at 7% on Wednesday, where it’s been since new leadership halted rapid hikes last summer. Policy makers also maintained a commitment to prevent major currency swings, which has helped the koruna outperform its regional peers in the past year.
Governor Ales Michl will hold a news conference at 3:45 p.m. in Prague.
Most Czech central bankers consider current monetary policy tight enough, saying that declining household consumption and a cooling property market are signs that home-grown price pressures are easing. They also argue that a further rate increase would disproportionately hurt local companies that can’t get cheaper loans in euros.
Czech inflation eased in February, to 16.7%, and the central bank expects it to slow to below 10% in the second half of the year. The bank’s latest projection sees price growth retreating to the 2% target by the middle of next year.
Still, some board members see an overheating labor market as a potential inflationary risk and have warned that more tightening may come if salaries jump too much and threaten to cause a wage-price spiral.
Several rate setters have tried to push against market bets on an early start of policy easing, saying the board won’t consider such move until inflation slows to single digits and is on a clear downward path.
Money-market prices show zero likelihood of borrowing costs rising further, and indicate wagers on at least 100 basis points of cuts this year, starting this summer.
“But given the persistent demand pressures in the domestic economy, the rate cuts might come later, and the central bank may make comments in this spirit too,” Komercni Banka AS analyst Jana Steckerova said before the rate announcement.
Since the leadership overhaul, a majority of board members has preferred to smooth out the interest rate path instead of following staff forecasts implying more sharp rate hikes and then rapid cuts just months later. One board dissenter, Tomas Holub, has advocated higher rates because he sees risks that inflation will become entrenched.
Deputy Governor Eva Zamrazilova said last week that the stronger koruna is also helping tighten monetary conditions by curbing the profitability of large exporters, which are able to secure cheaper financing in euros.
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