Czech cenbank holds rates steady, not giving up hike debate

Governor Ales Michl said rates were at a level that was dampening demand pressures and would remain high for some time as the bank was determined to bring double-digit inflation back to its 2% target. The board will continue to debate whether a further hike is warranted, Michl said, while "not a word" on rate cuts was spoken at the meeting on Wednesday.

The Czech National Bank (CNB) held interest rates steady on Wednesday, as expected amid signs of peaking inflation, staying on hold for a fourth straight meeting while not giving up the option of further tightening. Governor Ales Michl said rates were at a level that was dampening demand pressures and would remain high for some time as the bank was determined to bring double-digit inflation back to its 2% target.

The board will continue to debate whether a further hike is warranted, Michl said, while "not a word" on rate cuts was spoken at the meeting on Wednesday. "The bank board... will decide at the next meeting whether rates will remain unchanged or increase," Michl said.

"From this point of view, the market’s expectation that we will not increase rates in the first half of next year may not materialise. The bank board stands ready to raise rates, especially if the risk of demand-pull inflation increases." The bank's board voted 5-2 to keep the benchmark two-week repo rate at a more than two-decade high of 7.00%, with two members supporting a 50 basis point increase.

It has supplemented policy with market interventions since May to prevent the crown from weakening, which it said on Wednesday it would continue. But interventions have eased as the crown has gradually hit 10-month highs amid better market sentiment.

The central bank launched one of Europe's sharpest rate-hiking cycles last year, lifting the key rate by 675 basis points between June 2021 and June 2022. It has been on hold since Michl took the bank's helm in July and three new members joined the board. Price growth hit its highest rate in around three decades, at 18%, in the second half of 2022 but has eased somewhat as government measures to help households and firms deal with soaring electricity bills take effect.

Michl has advocated steady policy to help anchor the economy as it slips into a mild recession. The bank predicts an overall economic drop of 0.7% in 2023. Quarterly growth should revive in the second half of the year, it said.

Analysts have forecast steady rates in the first half of next year before the bank will debate the first cuts. Other central Europe rate setters are also seeking to keep rates steady after starting hiking cycles last year, moving quicker than global peers like the European Central Bank or U.S. Federal Reserve.

Policymakers are still watching for any big pickup in nominal wage growth, although real wages fell by almost 10% in the second and third quarters, hitting spending power amid war in Ukraine and sky-high energy and food prices. The government's fiscal policy is also staying loose as it seeks to spend to help people hurt by high utility bills, which could add to inflationary pressures.