(Bloomberg) -- Czech central bankers slowed the pace of monetary easing as lingering price pressures and koruna depreciation overshadowed the need to support a sluggish economic recovery. The koruna gained.
All seven board members voted to lower the key interest rate by a quarter of a percentage point to 4.5% on Thursday, in line with estimates by economists and ending a string of four consecutive half-point reductions.
Governor Ales Michl described the move as a “hawkish cut,” saying in a news briefing that elevated growth in the costs of services posed an inflationary risk and was a reason for cautious approach to further easing.
“That is one of the reasons why the bank board regards it as necessary that we maintain a strict monetary policy and carefully weigh further rate reduction,” he said.
He declined to comment on his or the board’s views of the likely future interest-rate path.
Michl’s comments show that policymakers remain concerned that consumer price growth might flare up again after it returned to the 2% target this year from a peak of 18% in 2022.
Some board members previously also mentioned risks related to the housing market and a potentially looser fiscal policy in the election year 2025.
Still, money-market prices before the meeting showed some investors were positioned for another half-point cut. Bets on the amount of monetary easing over the next 12 months increased in July after lower-than-expected retail, inflation and gross domestic product data.
The central bank also slightly lowered its average inflation forecast for this year to 2.2% from 2.3% and kept its projection for 2025 at 2%. It lowered its 2024 GDP growth outlook to 1.2% from 1.4%.
Michl said the board assessed the risks to the fresh quarterly forecast as “broadly balanced overall.”
The governor added that he and most of the board were of the view that “a slight undershooting of the inflation target wouldn’t matter,” given the previous long period of consumer price growth running above 2%.
“On the contrary, it is somewhat welcome,” he said.
The koruna gained 0.2% to 25.37 per euro as of 5:26 p.m. in Prague after Michl’s comments, reversing a drop by as much as 0.4% before the meeting. The Czech currency is still 1.3% weaker this quarter, the worst performance among European emerging markets.
“We assume that the CNB will keep cutting rates in 25 basis-point steps to 3.75% at the end of the year,” said analyst Dominik Rusinko at CSOB AS in Prague. “But the surprisingly hawkish rhetoric represents a risk of slower monetary easing, including a potential tactical pause at the end of the year.”
(Updates with Michl’s comments, fresh forecast from third paragraph.)
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