Czech National Bank Policy Outlook

By Jan Lopatka and Jason Hovet
PRAGUE (Reuters) – The Czech National Bank (CNB) has limited room to ease monetary policy this year, with domestic inflation threats warranting caution. Vice-Governor Jan Frait indicated there will be debate on keeping or cutting rates at next week’s policy meeting.

Frait told Reuters there was some room for more easing but it was limited after 3 percentage points of cuts since December 2023, reducing the two-week repo rate to 4.00%.

> “I assume that we are not too far from where monetary policy would start to act truly neutral or slightly supportive; we are about half a percentage point from there,” Frait said in an interview at the central bank on Tuesday, with remarks agreed for publication on Wednesday.

Frait mentioned that rates “could get to 3.5%” in the second half of the year or towards its end “if everything develops as expected” – this surpasses the 3% year-end level suggested in the central bank’s economic forecasts.

The CNB paused its rate-cutting in December, aligning with Hungary and others in central Europe, despite expectations of four more cuts from the European Central Bank in the first half of the year.

Markets foresee a strong chance of a 25 basis-point rate cut at the February 6 policy meeting after December’s inflation fell below forecasts. Policymakers will also review preliminary price data for January before the meeting.

Governor Ales Michl conveyed to the Financial Times that it was “very likely” the bank would cut interest rates next week. Likewise, central bankers Jan Prochazka and Vice-Governor Eva Zamrazilova expressed openness to resuming easing.

Frait, however, exhibited more caution, stating, “I think at this meeting we will discuss staying on hold or a 25-basis-point (cut). I consider both possible.”

INFLATION FACTORS

Frait pointed out that inflation in the services sector, still at 5% in December, contributed to the need for caution. He projected the labour market to remain tight despite weaknesses in the manufacturing sector reliant on German demand.

> “We see that, for example, real estate prices are growing in a way that can be interpreted as meaning that some people have concerns about future inflation,” he added.

Frait noted that in these segments, policy was no longer restrictive, and “some further easing actually does not really have much logic here.”

Headline inflation stood at 3.0% year-on-year in December, at the upper end of the 1 percentage point tolerance band around the bank’s 2% target, but below the bank’s forecast.

The Czech economy, heavily reliant on exports, now faces threats from new U.S. tariffs under President Donald Trump, potentially impacting global trade.

> “It could ultimately have anti-inflationary impulses, mainly because Europe would be pressured into cutting costs to remain competitive on prices,” Frait noted, adding tariffs might compel China and other countries to redirect their exports elsewhere, including Europe.