Czech Central Bank Halts Easing Cycle

(RTTNews) - The Czech National Bank left its key interest rate unchanged on Thursday after cutting it in each of the past eight policy sessions as inflation is expected to remain above the 2 percent target for the next two years.

The CNB Bank Board left the two-week repo rate at 4.0 percent as expected. Five rate-setters voted in favor of this decision, while two members voted for lowering key rates by 0.25 percentage point.

The CNB started lowering interest rates in December 2023 and the key repo rate fell from 7 percent to 4 percent. Monetary policy nonetheless remains tight, the bank said.

Inflation is forecast to be slightly above the 2 percent target from 2025 Q2 until the end of 2026, the bank said citing its updated projections.

"The disinflation process in the core components of the consumer basket, especially in the services sector, is not yet completed," the CNB said. "For these reasons, the Bank Board decided to pause the interest rate reduction process for the time being."

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Price growth is expected to rise temporarily in the short-term owing to renewed growth in food prices and to base effects. Headline inflation is seen within the upper half of the tolerance band early next year, aided by significantly slower growth in administered prices.

Capital Economics economist Liam Peach expects the central bank to resume the easing cycle next year as the inflation outlook remains favorable.

"Inflation has stayed within the central bank's 1.0-3.0 percent target range throughout this year, and we think that will remain the case next year too," Peach said.

"We expect a further 100bp of cuts spaced out over the course of the year, taking the policy rate to 3.00 percent by end-25. This is likely to leave Czechia as one of the few EMs where policy returns to neutral."