(Bloomberg) -- Czech policymakers signaled inflationary risks may slow the pace of monetary easing after the central bank cut borrowing costs by half a percentage point for a third consecutive meeting.

The Czech National Bank lowered the benchmark rate to 5.25% on Thursday as expected, while also lifting the interest rate outlook for this year and next in its new forecast. 

Officials have maintained a steady pace of easing this year after price growth slowed to their 2% target in the first quarter from a peak of 18% in 2022. But Governor Ales Michl reiterated that the bank may halt policy easing if it sees a threat of a resurgence in inflation, pointing to risks in the persistent growth in cost of services and a weakening koruna.

“The fight against inflation isn’t over,” Michl told reporters in Prague. “The bank board considers it necessary to maintain tight monetary policy and have a very cautious approach to further rate cuts.”

Policymakers have warned that rising prices for services, a housing-market recovery and hawkish signals from the US Federal Reserve are all reasons to keep relatively restrictive conditions at home.

The bank on Thursday improved the 2024 economic growth outlook and raised projections of key market interest rates by a full percentage point, implying the benchmark rate at around 4% at the end of this year.

The board still sees rates “rather higher” than the new baseline scenario, “but we are closer to the forecast than we were” before, Michl said.

The new forecast for the rate path and Michl’s comments boosted the koruna, which strengthened as much as 0.6% against the euro. Over the past two months, investors have significantly scaled back bets on the scope of Czech easing, following a similar shift in the US and the euro area. 

The central bank “sent a relatively hawkish message” to the market, and its possible that it will slow the pace of policy easing as early as at the next meeting in June, according to Radomir Jac, chief economist at Generali Investments CEE in Prague. 

Still, policymakers could have room for a “slightly faster” rate reduction this year if their rhetoric pushes the koruna to stronger levels than assumed by the forecast, Jac said in a report.

--With assistance from Deana Kjuka and Harumi Ichikura.

(Updates with governor’s comments starting in third paragraph.)

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