Czech central bank refrains from hike but easing still far off

The Czech National Bank (CNB) left interest rates unchanged as expected on Wednesday, reinforcing a market view that rates have peaked and the next move will be downward sometime around the end of this year as inflation eases. The decision leaves the main repo rate at 7.00%, where it has stood for a year, as the bank under new Governor Ales Michl ended a string of hikes and instead stepped into the currency market on several occasions to prop up the exchange rate to tighten monetary conditions.

The Czech National Bank (CNB) left interest rates unchanged as expected on Wednesday, reinforcing a market view that rates have peaked and the next move will be downward sometime around the end of this year as inflation eases.

The decision leaves the main repo rate at 7.00%, where it has stood for a year, as the bank under new Governor Ales Michl ended a string of hikes and instead stepped into the currency market on several occasions to prop up the exchange rate to tighten monetary conditions. The bank came surprisingly close to a hike at its May 3 meeting when three out of seven board members voted for a 25-basis-point increase.

Since then, first-quarter wage data showed lower-than-forecast pay growth and the government presented a package of tax hikes and spending cuts aimed at slashing the budget deficit. Both were factors speaking for less urgency on the rate front, analysts and central bankers have said.

The bank is expected to maintain its mantra that rates would remain "higher for longer" when Michl holds a news conference at 3:45 p.m. (1345 GMT) to comment on the decision. Michl has dismissed talk about rate cuts as premature, even telling the market in the past it was pricing policy easing in too early.

A Reuters poll showed all analysts expected the bank to refrain from a rate hike on Wednesday. Six out of 11 forecast a cut in the fourth quarter and three in the first quarter next year. Only two forecast a cut in the third quarter, reflecting a shift of expectations since May toward a later start to the downward path.

Inflation dropped less than expected year-on-year in May to 11.1%, but previous drops still kept it 0.5 percentage points below the central bank's spring forecast. Michl reiterated last week that inflation would drop to single digits within two months.