The Czech central bank kept borrowing costs unchanged but is likely to intensify its hawkish warnings about persistent home-grown inflation risks.
(Bloomberg) — The Czech central bank kept borrowing costs unchanged but is likely to intensify its hawkish warnings about persistent home-grown inflation risks.
Policy makers kept the benchmark rate at 7% on Wednesday, as expected, maintaining the highest interest rate since 1999 for a seventh meeting. The bank will comment on the decision and present the highlights of its economic forecasts, including an inflation outlook and the implied path for rates, at a news conference scheduled for 3:45 p.m. in Prague.
The board is weighing weak household spending and a cooling property market against an overheated labor market and a widening budget deficit. The Czech economy emerged from a mild recession in the first quarter, with manufacturing industries seeing stronger demand for cars, auto parts and other key export items, and unemployment running at the lowest level in the European Union.
“Inflation risks aren’t weak at all and they’re being offset only by the stronger koruna exchange rate at the moment,” Jan Bures, the chief economist at brokerage Patria Finance, said in a report before the announcement.
He said that some of the board members have recently sounded more concerned about higher inflation expectations, but for now they seemed to consider it more as an argument against cutting rates too soon rather than raising them further.
Since the leadership change last summer, most policymakers have preferred to smooth out the rate path, while the bank’s forecasts imply a further increase in borrowing costs, followed by cuts several months later. They’ve seen a strong currency as a tool to tighten conditions for large export-oriented businesses that are increasingly tapping cheaper financing in euros.
A key factor behind the Czech currency’s strength is the central bank’s year-old pledge to prevent excessive depreciation. The bank reaffirmed the commitment on Wednesday.
Money market investors are betting that monetary easing will begin by September, expecting 100 basis-points of cuts by the end of this year. Central bankers have previously pushed back against speculation on a rapid decline in borrowing costs.
“In terms of rhetoric, the central bank will probably repeat that rates may stay elevated for longer and that it’s prepared to act if there was a threat of wage-price spiral,” said Jana Steckerova, an analyst from Komercni Banka AS.
–With assistance from Deana Kjuka.
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