Czech central bank kicks off rate-easing cycle with 25 bps cut

PRAGUE (Reuters) -The Czech National Bank (CNB) started an interest rate-easing cycle on Thursday with a 25 basis-point reduction that puts the main repo rate at 6.75%, the first cut in more than three years amid a backdrop of slowing inflation and a sagging economy.

Markets had priced in the rate cut, with 12 of 15 analysts in a Reuters poll also forecasting it. The crown eased and was down 0.4% on the day at 24.564 to the euro after the decision.

The cut is a signal the bank believes it can bring inflation down significantly, with base effects set to cut price growth to 3% in January and move it closer toward the bank’s 2% target later in 2024.

The Czech bank lifted borrowing costs by 675 basis points to more than two-decade highs between June 2021 and June 2022 as central European policymakers sharply tightened policy to battle inflation surging to double-digit rates.

Since the middle of last year, though, under the new leadership of Governor Ales Michl it has held steady with its key two-week repo rate at 7.00% – despite suggestions by the bank’s staff model to tighten more.

It had maintained a cautious hold in recent months even as the Hungarian and Polish central banks eased policy.

Michl said this month the bank was set to remain hawkish whether it cut rates now or not.

Central bankers have been wary of companies repricing their goods and services at the start of 2024, leaving an argument to wait until upcoming meetings in February or March before easing policy.

A worry over renewed wage growth in what is one of the European Union’s tightest labour markets is another concern.

But economic data has been sluggish. Household spending has dropped and the economy overall declined by 0.6% in the third quarter from the previous three months. It is forecast by the central bank to shrink 0.4% in the full year, and to eke out a 1.2% expansion in 2024.

With global central banks like the U.S. Federal Reserve or European Central Bank calling an end to their own tightening cycles, analysts saw the balance shifting to a cut now.

Policymaker Jan Prochazka, who had backed stable policy in November, told Reuters last week that inflation risks that had prevented the start of easing have been gradually disappearing, and that a cut in December would also be sign of confidence that the January repricing will not be large, and that central bank believes it can deliver low inflation next year.

Headline inflation stood at 7.3% in November after hitting a peak of 18% in September 2022.

The central bank was due to comment on its decision in a statement and news conference by Michl at 3.45 p.m. (1445 GMT).

(Reporting by Jason Hovet and Jan Lopatka)