(Bloomberg) -- The Czech central bank paused its year-long monetary-easing cycle, leaving the door open for a resumption of interest rate cuts as early as in February.
Policymakers in Prague left the key interest rate unchanged at 4% on Thursday, following eight consecutive reductions that brought borrowing costs down by 3 percentage points. The decision was backed by five board members, while two sought another quarter-point reduction.
Consumer-price growth has slowed toward the bank’s target this year and export-reliant industries are suffering from weak German demand. But wages climbed more than expected in the third quarter, and officials have repeatedly pointed to a stubborn rise in the cost of services as a threat to the inflation outlook.
“The disinflation process in the core components of the consumer basket, especially in the services sector, is not yet complete,” Governor Ales Michl told reporters. “For these reasons, the bank board decided to pause the interest-rate reduction process for the time being.”
The move underscores a divergence between central and eastern European policymakers adopting a more cautious path and other major economies bent on easing.
European Central Bank officials signaled last week that borrowing costs will continue to decline after making the fourth rate cut of the year. The US Federal Reserve delivered a widely-anticipated rate cut on Wednesday — though it trimmed the outlook for more moves next year.
In future decisions, the Czech board will evaluate the persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy, trends in the labor market and strength of domestic and external demand, Michl said. The next debate in February will be most likely again about whether to hold rates or cut them, he said.
“We are leaving all options open, but for now we regard this as a pause in interest-rate cuts,” the governor said.
Money-market prices indicate that investors have mostly scaled back bets on further cuts and anticipate around 50 basis points of easing next year.
Modestly Inflationary
Rates will probably stay on hold at the next two meetings, with the next cut coming in May, although an earlier move can’t be ruled out, according to Ceska Sporitelna AS, the Czech unit of Erste Group Bank AG.
“A number of inflationary factors, including the continued recovery of household demand, relatively strong wage growth, low unemployment and an expansive fiscal policy will spill over into the beginning of next year, meaning that the central bank can remain cautious,” said Ceska Sporitelna analyst Jiri Polansky.
The central bank board said the risks and uncertainties to meeting the inflation target were “modestly inflationary.”
Upside price risks include the costs of services, budget spending, wage demands, commodity prices and mortgage lending, policymakers said. A downturn in global economic activity and weaker German output are the main anti-inflationary risks.
“Some large central banks have already responded to this risk by lowering monetary policy rates and indicating their readiness to continue easing monetary conditions next year,” Michl said. “The impact of possible actions by the newly elected US administration represent a source of uncertainty for prices.”
(Recasts and adds comments from the meeting from first paragraph.)
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