(Bloomberg) -- The Czech central bank signaled it’s moving closer to pausing a series of interest-rate cuts as concerns about inflation risks prevail over a worsening economic outlook.
The Czech National Bank board weighed a sluggish recovery from the pandemic and the energy crisis against accelerating price growth before it lowered the benchmark rate by 25 basis points to 4% on Thursday. The meeting, at which one rate setter sought to keep borrowing costs unchanged for the first time in this cycle, brought the cumulative cuts in the last year to 3 percentage points.
“Most of the bank board is now focusing on the risk of elevated inflation in the future,” Governor Ales Michl told reporters in Prague. “We simply need to remain strict to ensure that inflation really goes back down to 2% next year.”
Policymakers will approach further monetary easing with “great caution” and they may pause or terminate it “in the months ahead” at still-restrictive levels, the central bank chief said.
While inflation will remain elevated in the next few months due to an increase in volatile food prices and temporary effects, Michl said that persistent growth in the cost of services remains a reason for careful policy steps. Prospects for more economic weakness abroad, chiefly in the nation’s main export market of Germany, represent a stagnation risk for the Czech Republic, as well as a potential anti-inflationary factor, according to the governor.
“We discussed that, it is reflected in our forecast,” Michl said. “But, for most board members, the risk of higher inflation is stronger than the risk of us having to react to this economic downturn.”
The Czech central bank’s new staff projections cut the outlook for gross domestic product growth for this year and next, and increased the forecast of consumer price growth in both 2024 and 2025.
Compounding the global headwinds is Donald Trump’s victory in the US presidential election and his plans for trade tariffs as the Czech economy relies heavily on exports. That could further hurt economic growth, but also put pressure on the koruna if Trump’s plans stoke inflation and force the US Federal Reserve to keep policy more restrictive.
The Czech currency has been more resilient than its regional peers to swings in global sentiment toward riskier assets. It rebounded from an initial slide following the results of the US election, gaining as much as 0.5% against the euro after the briefing.
Based on Michl’s comments, the bank board sees inflation as a bigger problem than economic performance, with a focus on rising prices of services and higher wage demands, according to Jan Bures, the chief economist at brokerage Patria Finance.
“In this context, pausing the cycle of monetary-policy easing could be in play in December or February,” Bures said, adding that Patria’s baseline scenario is still for two more 25 basis-point rate reductions before the bank halts the cuts.
(Recasts throughout with governor’s comments, central bank forecasts)
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