Czech National Bank Likely to Cut Interest Rates

By Jason Hovet

PRAGUE (Reuters) – The Czech National Bank (CNB) is expected to implement its eighth consecutive interest rate cut next week due to ongoing weak economic growth and stable inflation near the target, as indicated by a Reuters poll.

The central bank has moderated its easing campaign, which began at the end of the previous year, adopting standard 25-basis-point cuts in its last two meetings. Overall, it has reduced its main rate by 275 basis points, bringing it to 4.25%.

In the poll, 14 out of 15 analysts predicted an additional 25-basis-point cut, lowering the two-week repo rate to 4.00% during the bank's policy meeting on November 7. One analyst anticipated no change.

Erste Group Bank's Ceska Sporitelna emphasized the broad expectation for the rate decline, citing relatively low inflation compared to the current interest levels and slow GDP growth. The Czech economy is still recovering slowly, failing to create substantial inflationary pressures.

Additionally, cuts from the European Central Bank (ECB) have provided the Czech bank with further flexibility to lower rates. The ECB enacted its third cut this year in October and is currently assessing the future scope for additional cuts.

In central Europe, Hungary's central bank paused its rate cuts in October amid rising price pressure concerns linked to the weakening forint.

Recently, the Czech crown has performed relatively well against other currencies, despite global uncertainties from events such as the U.S. presidential election and the stronger dollar.

The Czech economy faces challenges from slow consumer demand following past inflation surges, alongside sluggish manufacturing impacted by weak trade partner demand, particularly from Germany.

Inflation slightly increased to 2.6% year-on-year in September, remaining within the 1-percentage-point tolerance band around the 2% target.

Cautious approaches to future cuts have been noted by the bank's board. Rate-setter Jan Prochazka mentioned in an interview last month that while the bank may continue to ease due to weaker growth, attention must be paid to inflation issues, particularly in the services sector.

Some analysts speculate that the bank might halt its easing strategy in December. The poll indicates a continued downward trend in rates for the next year, with the median forecast predicting a main rate of 3.00% by the third quarter.