Czech central bank warns markets that rate cuts not on agenda

Markets also price Polish cuts this year. The Czech bank had come surprisingly close to a hike at its May 3 meeting, when three out of seven board members supported tightening. Since then, first-quarter wage data showed lower-than-forecast pay growth and the government presented a package of tax hikes and spending cuts.

The Czech National Bank (CNB) left interest rates flat at more than two-decade highs on Wednesday, with one less policymaker raising a hand for a further hike to reinforce a market view that policy tightening was over even as the bank kept the option open. The central bank maintained its hawkish tone after Wednesday's meeting and reiterated bets on an interest rate cut - which markets price some chance of already in September - were premature.

It repeated the board would debate maintaining stable rates or raising them at the next meeting in August. The central bank has been cautious on signalling an official end to a tightening cycle totalling 675 basis points in hikes that started in 2021 and paused a year ago. The base rate stays at 7.00% after Wednesday's 5-2 vote.

The bank is watching risks from wage growth and a deficit ballooning at a record pace which the government is trying to fix. "Although inflation has fallen more markedly in recent months than expected in the baseline scenario of the CNB forecast, the bank board still expects interest rates to stay at the current or a higher level for longer," Michl said.

"We consider the market expectations regarding the timing of the first decrease in rates to be premature." He added the board agreed the trajectory of interest rates will be higher than the bank's latest forecast seeing lower market rates from the third quarter suggested.

"It makes no sense to speculate on when interest rates will be lowered, it is not at all on the table now, and we will now not be discussing it. In my view the market expectations will not be fulfilled." Market pricing going into Wednesday showed more than two 25 basis-point cuts happening by the end of the year as investors expect Czech policymakers to follow easing efforts already started elsewhere in central Europe.

Hungary's central bank delivered a second straight 100-basis-point reduction to its one-day deposit rate on Tuesday. Markets also price Polish cuts this year.

The Czech bank had come surprisingly close to a hike at its May 3 meeting, when three out of seven board members supported tightening.

Since then, first-quarter wage data showed lower-than-forecast pay growth and the government presented a package of tax hikes and spending cuts. Michl said the board would assess the austerity package once parliament approved measures.

Headline inflation eased to a rate of 11.1%, and is expected to fall into single digits for the first time since the beginning of 2022 in the coming months. A Reuters poll last week showed six out of 11 analysts forecast a cut coming in the fourth quarter and three in the first quarter next year.

"The market is not believing the CNB will resist cutting rates before the end of the year," Komercni Banka trader Dalimil Vyskovsky said.