Central Bank decreases rates in July

At its meeting on 23 July, the Monetary Council decided to lower the Central Bank base rate by 25 basis points to 6.75%, the overnight (O/N) deposit rate to 5.75% and the O/N collateralized lending rate to 7.75%. The decision was broadly in line with market expectations.

Inflation remained within the Central Bank's tolerance band and was in line with its prior projections in June. The Bank also took into account the dovish factors of weak economic activity in Europe and a general decline in investment. Meanwhile, June saw a slight rise in core inflation to 4.1%, and the Bank noted a significant increase in real wages and growing household consumption.

The Central Bank provided no explicit forward guidance on future interest rate decisions but reiterated that it would adopt a cautious approach to monetary policy, taking into account risks surrounding global and domestic disinflation, volatility in international investor sentiment and the expected interest rate policies of major central banks. The Consensus is for about 25 basis points of further rate cuts by year-end, with the pace of monetary policy easing in the EU and the U.S. key to watch. Stronger-than-expected wage growth and economic activity pose upside risks to the policy rate. The Bank is scheduled to convene next on 6 August.

ING analysts Peter Virovacz and Frantisek Taborsky commented on the outlook: “We continue to believe in the need for a substantially positive real interest rate and, in contrast to the central bank's forecast, we continue to expect stronger monthly repricing over the remainder of the year, mainly on the back of pro-inflationary fiscal measures and stronger-than-expected wage growth. Against this backdrop, we maintain our call for a year-end policy rate of 6.50% with some downside risk to our call mainly stemming from our non-consensus inflation outlook.”

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