Czech central bank gives few clues on when rate cut might come

By Jan Lopatka and Jason Hovet

PRAGUE (Reuters) – The Czech National Bank left its main interest rate unchanged at a more than two-decade high on Wednesday and said the expected rate path ahead would be higher than the bank’s outlook, but left few other clues on the timing of a first rate cut.

Markets have been betting that with inflation on a downward path, the Czech central bank could soon join peers in Hungary and Poland in easing policy, starting with rate cuts in November or December.

The central bank has held its main two-week repo rate at 7.00% since mid-2022, after lifting it from near zero in a one-year tightening cycle to tackle inflation which was soaring into double-digit territory.

It voted 7-0 on Wednesday for no change. Governor Ales Michl declined to give any outlook on when rates could head lower.

“I will not give any probability,” he said when asked how likely a change was in November or December.

He added a plan for lowering rates was discussed but that a cut on Wednesday was not on the table.

“We have a clear strategy but the key is that at each meeting of the board, we will evaluate new data, we will have a new forecast or an update of the latest forecast,” Michl said.

In a Reuters poll of economists last week, a sizable majority saw the bank delivering a first rate cut in November or December, while a minority said the bank would wait until the first quarter.

Headline inflation has come down steadily since the start of 2023, falling to 8.5% year-on-year in August, after peaking at 18% in 2022.

The bank has said headline inflation should drop to its 2% target in the first half of next year.

Michl told reporters would not mind some undershooting of the target next year given core inflation was still seen at 3%.

With the Czech labour market among the tightest in the European Union, central bankers have been watching for a pickup in wages and demand that would increase price pressures again.

They have also said there is uncertainty over annual re-pricing in January and impacts of planned tax changes.

A weaker crown currency – which fell to nearly one-year lows after Poland delivered a sharper-than-expected interest rate cut in early September – is also a factor.

The bank board said in its statement on Thursday the crown weakened due to regional sentiment but noted it was still stronger year-on-year.

The crown was stronger on Wednesday, but it is down almost 1% since the start of the year. It trades at 24.36 to the euro, below a third-quarter average rate of 23.8 assumed in the bank’s latest forecasts.

(Reporting by Jason Hovet and Jan Lopatka; Editing by Anil D’Silva and Ed Osmond)