The Czech National Bank (CNB) began an interest rate-cutting cycle on Thursday, cutting the main repo rate by 25 basis points to 6.75%, the first cut in more than three years amid slowing inflation and a sagging economy.
Markets had priced in the rate cut, with 12 of 15 analysts polled by Reuters forecasting it as well. Following the decision, the crown eased and was down 0.4% on the day at 24.564 to the euro.
The cut indicates that the bank believes it can significantly reduce inflation, with base effects expected to reduce price growth to 3% in January and bring it closer to the bank’s 2% target later in 2024.
Between June 2021 and June 2022, the Czech bank raised borrowing costs by 675 basis points to more than two-decade highs, as central European policymakers tightened policy to combat double-digit inflation.
However, under the new leadership of Governor Ales Michl, it has maintained its key two-week repo rate (CZCBIR=ECI) at 7.00% since the middle of last year, despite suggestions from the bank’s staff model to tighten further.
It had maintained a cautious stance in recent months, despite policy easing by the Hungarian and Polish central banks.
Michl stated earlier this month that the bank would remain hawkish whether rates were cut now or not.
Central bankers have been wary of companies repricing their goods and services at the start of 2024, arguing that policy should be eased at upcoming meetings in February or March.
Another source of concern is renewed wage growth in one of the European Union’s tightest labor markets.
However, economic data has been slow. Household spending fell, and the economy shrank by 0.6% in the third quarter compared to the previous three months. The central bank expects the economy to contract 0.4% this year and expand 1.2% in 2024.
With global central banks such as the United States Federal Reserve and the European Central Bank declaring the end of their own tightening cycles, analysts believe the balance is shifting to a cut now.
Policymaker Jan Prochazka, who supported stable policy in November, told Reuters last week that inflation risks that had prevented the start of easing have gradually faded, and that a cut in December would also be a sign of confidence that the January repricing will be small, and that the central bank believes it can deliver low inflation next year.
Headline inflation was 7.3% in November, down from 18% in September 2022.
Michl was scheduled to make a statement and hold a press conference about the central bank’s decision at 3:45 p.m. (1445 GMT).