(Bloomberg) -- The Czech central bank signaled it will maintain a cautious approach to further monetary easing after cutting borrowing costs to the lowest level in almost three years.
Policymakers reduced the benchmark rate by a quarter of a percentage point to 4.25% on Wednesday, extending a series of interest-rate cuts to a seventh meeting. The move was backed by six board members, though one dissenter viewed consumer price risks as less pronounced and sought a half-point move.
As the economy continues a sluggish recovery from the pandemic shock, weeks of data have shown weaker demand for exports, slower than expected wage growth and headline inflation moving near the official target of 2%.
Governor Ales Michl said officials will now “carefully” consider future reductions, highlighting persistent inflationary pressures in services. He also reiterated a warning that the bank may halt rate cuts, which have now reached a cumulative 275 basis points since December, at still restrictive levels if it sees rising danger of consumption-driven price growth.
“The vast majority of the bank board agreed that there was need for caution,” Michl told reporters in Prague.
Prospects of further policy easing by the US Federal Reserve and the European Central Bank has widened room for relaxing monetary conditions across emerging markets, but the changing economic picture abroad didn’t play a major role in the Czech central bank’s deliberations on Wednesday, according to Michl.
“We are trying to prevent inflation in the Czech Republic from rising again,” said Michl. “That’s why we weren’t influenced by the change in sentiment on financial markets.”
Before the September meeting, forward rate agreements implied the benchmark rate declining to 3.75% through December, and falling to, or even below, 3% over the next 12 months.
Michl declined to comment specifically on market expectations or provide concrete guidance for the rate path.
“We are not making any commitment about what we will do next time or where rates will be at the end of the year or next year,” he said. “We will decide after assessing the new forecast and new data.”
The koruna weakened 0.3% to the euro after the governor’s briefing, underperforming regional peers, as investors looked past the central bank’s communication, which echoed previous comments.
“The overall state of the economy and inflation remaining inside the tolerance range will create pressure for further reductions in interest rates,” said Jaromir Gec, an economist at Komercni Banka AS in Prague. “We expect rate cuts of 25 basis points at each of the remaining two meetings this year.”
--With assistance from Harumi Ichikura.
(Recasts with more details, governor’s comments starting in third paragraph.)
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