Central Bank cuts rates further in September

25 basis point reduction meets market expectations: At its meeting on 25 September, the Czech National Bank (CNB) lowered the 2-week repo rate by 25 basis points to 4.25%. Moreover, the CNB lowered the discount and Lombard rates by the same amount to 3.25% and 5.25%, respectively. The move, which followed August’s same-sized reduction, had been priced in by markets but was not unanimous, as one member of the Bank’s board voted for a 50 basis point cut.

Sluggish economy, upside inflation risks motivate the cautious cut: The Bank noted that even though inflation has remained close to the 2.0% target since the beginning of the year, it will likely approach the upper bound of the 1.0–3.0% tolerance range in subsequent quarters, necessitating an extended period of tight monetary policy and only cautious rate cuts. Risks to the inflation outlook were seen by the Bank as predominantly skewed to the upside and include rising wage growth, potentially excessive public spending growth, higher-for-longer services inflation, and surging lending activity—particularly in the property market. With regards to economic activity, the CNB noted that the economic recovery has been slow and that growth remains below potential, adding impetus to continue cutting rates.

Policy rates to edge down further this year: The Bank stated that it could stop reducing interest rates ahead, either temporarily or for the foreseeable future, suggesting a cautious approach to future rate adjustments. That said, our Consensus is for the 2-week repo rate to end the year about 25 basis points lower than September’s level, though a significant amount of panelists see up to 50 basis points of additional rate cuts. Higher-than-expected inflation poses an upside risk, while weaker-than-anticipated activity in key trading partner Germany is a downside risk to both inflation and the policy rate.

Panelist insight: ING analysts David Havrlant and Frantisek Taborsky commented on the outlook: “We maintain our view of another 25bp rate cut in November, followed by a pause in December. The December pause-or-not-to-pause dilemma must be perceived as a close call, given that any forward guidance is absent. […] The easing cycle could carry on in early spring, bringing the rate to 3.25% by mid-next year, unless there are upward surprises in January's core inflation, such as a spike in the market and imputed rents, reflecting the renewed growth in residential property prices.”

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