Czech Central Bank expected to back 50-basis point rate cut

Policymaker Eyes Rate Cut: Jan Kubicek, a policymaker at the Czech National Bank, indicated that the bank could reduce interest rates by 50 basis points this month. He cited stabilised inflation risks and the crown currency as key factors in this decision.

Kubicek said that with inflation dropping to 2 per cent in February, risks have shifted away from previous concerns about inflation. He highlighted that inflationary risks are now relatively balanced, attributing remaining pro-inflationary factors to a potentially weaker exchange rate and rapidly rising service prices.

The bank had previously cut its repo rate by 50 bps in the prior month, settling at 6.25 per cent. Kubicek suggested a preference for a gradual approach to rate cuts, potentially reducing rates by 50 basis points at a time. He expressed the likelihood of supporting another 50 basis-point cut at the upcoming meeting on March 20, with further decisions contingent upon the bank's updated forecast in May.

Despite a slight weakening of the crown against the euro since the previous cut, Kubicek noted that the exchange rate had stabilised around 25.30 to the euro, a critical factor for an import-dependent economy like Czechia's.

Kubicek anticipated a slower pace of easing, expecting rates to reach around 4 per cent by year-end, aligning with the board's cautious approach following periods of double-digit inflation in 2023 and 2024.

He also highlighted shifts in expectations regarding policy easing by the US Federal Reserve and the European Central Bank, now anticipated in June, as a factor against faster rate cuts.

Regarding the exchange rate, Kubicek expected the interest rate differential between the crown and the euro to disappear by year-end. However, he did not foresee further currency weakness as a result.

Despite challenges stemming from weak foreign demand, Kubicek expressed optimism about a rebound in household consumption due to increased real wages, projecting GDP growth to exceed the bank's forecast of 0.6 per cent for the year, reaching above 1 per cent.

(With Reuters Inputs)