The Czech central bank will probably hold borrowing costs unchanged but the board is likely to intensify a hawkish warning as signals from the economy point to persistent home-grown inflation risks.
(Bloomberg) — The Czech central bank will probably hold borrowing costs unchanged but the board is likely to intensify a hawkish warning as signals from the economy point to persistent home-grown inflation risks.
Policy makers will keep the benchmark rate at 7% on Wednesday, according to all analysts in a Bloomberg survey, maintaining the highest interest rate since 1999 for a seventh meeting. The bank will also publish fresh quarterly economic forecasts, including an inflation outlook and the implied path for rates.
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.
While most board members have repeatedly pointed to weak household spending and a cooling property market as signs that interest rates are high enough, several policy makers have warned that fast wage growth and loose fiscal policy could require more monetary tightening.
“I won’t be surprised at all if we see more people voting for a rate hike on Wednesday,” said Petr Sklenar, chief economist at J&T Banka AS in Prague. “I can’t even rule out a majority vote for a hike, although the likelihood of that is rather low.”
Since the leadership change last summer, most policy makers have preferred to smooth out the rate path, even as the bank’s own forecasts implied raising borrowing costs further, followed by cuts several months later.
Board members who opposed more hikes have argued that higher local rates wouldn’t affect companies that are increasingly tapping cheaper financing in euros. Instead, they prefer a stronger koruna to tighten conditions for large export-oriented businesses.
A key factor behind the Czech currency’s strength is the central bank’s year-old pledge to prevent excessive depreciation. Board member Jan Kubicek said last week there’s no reason to scrap the current intervention regime while the fight against inflation persists.
With the central bank predicting inflation slowing to single digits after June, and reaching the 2% goal by mid-2024, money market investors are betting that monetary easing will begin in September. They expect 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, saying that stubborn inflation risks may require keeping rates elevated for longer than investors expect.
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