Czech Republic: Czech National Bank maintains monetary easing pace in March
At its 20 March meeting, the Board of the Czech National Bank (CNB) cut the two-week repo rate to 5.75% from 6.25%, following a similar 50 basis point cut at its previous meeting in February. In addition, the CNB reduced both the Lombard rate and the discount rate by 50 basis points to 6.75% and 4.75%, respectively. Five of the seven board members voted to reduce rates by 50 basis points, while two voted to deliver a more aggressive 75 basis point cut.
The Bank decided to maintain the pace of monetary easing unchanged amid a further moderation in price pressures; inflation fell from January’s 2.3% to the Bank’s target of 2.0% in February. That said, the CNB stated that the pace of monetary easing must be gradual due to upside inflationary risks stemming from potentially accelerating money creation, quickly growing services prices and rising imported goods prices due to koruna weakness.
Looking ahead, the Bank said that it “considers it necessary to persist with tight monetary policy and continue to approach further rate cuts with caution”, and that it will base its future decisions on incoming data on inflation, the exchange rate, fiscal policy, the labor market, and domestic and external demand. It also reiterated that “the interest rate reduction process can be paused or terminated at any time at levels that are still restrictive if inflation—especially core inflation—does not develop in line with the forecast”. Our panelists expect the CNB to cut rates further by year-end due to declining price pressures.
The Bank’s next meeting will be on 2 May.
Commenting on the Bank’s decision, ING’s Frantisek Taborsky stated:
“The CNB is cutting rates further but an acceleration in the pace is not on the table for now. We believe the economic data and further decline in inflation will keep the same discussion between a 50bp and 75bp move for the next meeting in May alive. However, given the hawkish communication, we slightly prefer a 50bp rate cut looking ahead.”
Meanwhile, analysts at EIU commented on the outlook:
“We expect the CNB to cut its main policy rate to a neutral level by end-2025, which is sooner than the other central banks in the region. However, keeping inflation within the CNB’s target range (2% ±1 percentage point) will prove a challenge, especially in 2025. We therefore expect the CNB cut rates slowly, by about 50 basis points each quarter until mid-2025. This will be followed by two more 25-basis-point cuts in the second half of 2025, when the policy rate will stabilise at 3%.”