The Czech National Bank is expected to make its first interest rate cut in over three years, signaling a shift in policy amid slowing inflation and a struggling economy. Market forecasts indicate a rate reduction on Thursday, with the majority of analysts predicting a 25 basis point decrease. This comes after a period of significant tightening measures implemented between June 2021 and June 2022 when borrowing costs were raised by 675 basis points to combat rapidly rising inflation rates.
Under the new leadership of Governor Ales Michl, the Czech National Bank has maintained a cautious approach by keeping its key two-week repo rate at 7.00% since mid-last year. While neighboring central banks such as Hungary and Poland have eased their policies, the Czech central bank has remained steadfast in its decision. Governor Michl emphasized the Bank’s commitment to a hawkish stance, regardless of whether rates are cut now or in the future.
Central bankers have expressed concerns over the potential repricing of goods and services by companies at the beginning of 2024. This concern provides an argument for delaying the interest rate cut until upcoming meetings in February or March. Another area of worry is the renewed wage growth in the country, especially considering its position as one of the tightest labor markets within the European Union.
However, economic data has been less than stellar, with a decline of 0.6% in the overall economy during the third quarter compared to the previous three months. The central bank predicts a further 0.4% contraction for the full year, followed by a modest 1.2% expansion in 2024. Given the recent announcements from global central banks like the U.S. Federal Reserve and European Central Bank signaling an end to their tightening cycles, analysts believe it is now the right time for the Czech National Bank to make a cut.
Several factors contribute to the argument in favor of a careful interest rate cut. Firstly, the global shift towards dovish monetary policies, coupled with a weaker economic outlook, adds weight to the need for a reduction. Additionally, there have been no inflationary surprises in the data since the last policy meeting in November. Moreover, the cautious approach taken by many board members further supports the case for a rate cut.
In November, the board voted 5-2 in favor of keeping rates unchanged, with a minority already advocating for a cut. It is possible that more policymakers will join the call for easing at the upcoming meeting. Jan Prochazka, a member of the board who previously supported stable policy, noted that inflation risks have gradually diminished, making a rate cut in December a sign of confidence in the upcoming repricing in January. Vice-Governor Eva Zamrazilova, who also voted with the majority last month, indicated that the decision for the December meeting is “50-50.”
As of November, headline inflation stood at 7.3% after reaching its peak of 18% in September 2022. Forecasts predict that inflation will return to the central bank’s target range of 2% +/- 1 percentage point next year. The Czech National Bank is scheduled to release its rate decision at 2.30 p.m. (1330 GMT) on Thursday, followed by a news conference at 3.45 p.m.
The Czech National Bank’s anticipated interest rate cut reflects the current economic challenges faced by the nation. Despite initial hesitation due to concerns over wage growth and repricing, economic data suggests the need for a reduction. With favorable global conditions and the potential support of additional board members, it appears to be the right time for the central bank to take action. The outcomes of this rate cut will become clearer in the coming months as the Czech Republic aims to stabilize its economy and manage inflation effectively.