The Czech National Bank (CNB) kicked off its interest rate easing cycle on Thursday by cutting the key repo rate by 25 basis points to 6.75%, the first cut in more than three years amid slowing inflation and economic downturn.
Markets were counting on the price of a rate cut, with 12 of 15. The koruna weakened after the decision and was down 0.4% to 24.564 per euro that day.
The cut is a signal the bank believes can significantly reduce inflation, with underlying effects expected to reduce price growth to 3% in January and bring it closer to the bank’s 2% target later in 2024.
The Czech bank raised borrowing costs by 675 basis points between June 2021 and June 2022, the longest in more than two decades, as central European politicians tightened policy sharply to fight inflation surging to double-digit levels.
However, since the middle of last year, under the new leadership of Governor Aleš Michl, it has stuck with its key two-week repo rate at 7.00% – despite proposals from the bank’s staff model for further tightening.
It has maintained a cautious hold in recent months, even as the Hungarian and Polish central banks eased policy.
Michl said this month that the bank was set to remain hawkish, whether they cut rates now or not.
Central bankers were wary of companies revaluing their goods and services at the start of 2024, leaving the argument that they would wait until upcoming meetings in February or March to ease policy.
Another concern is the fear of renewed wage growth in one of the tightest labor markets in the European Union.
But economic data is slow. Household spending fell and the overall economy shrank 0.6% in the third quarter from the previous three months. The central bank predicts that it will contract by 0.4% for the full year and reach 1.2% growth in 2024.
With global central banks such as the US Federal Reserve or the European Central Bank calling for an end to their own tightening cycles, analysts saw the balance sheet now shifting to tapering.
Politician Jan Procházka, who supported a stable policy in November, told iFreshBriefs last week that the inflationary risks that prevented the start of easing were gradually disappearing and that the December cut would also be a sign of confidence that there would be no January revaluation. large and this central bank believes it can ensure low inflation next year.
Headline inflation reached 7.3% in November after peaking at 18% in September 2022.
The central bank was due to comment on its decision in Michl’s statement and press conference at 15:45 (1445 GMT).