Czech Republic Pauses Easing of Monetary Policy Amid Inflation Concerns

Investing.com -- The Czech Republic has ended a year-long cycle of monetary policy easing due to persistent inflation concerns, despite weak economic forecasts. Policymakers in Prague decided on Thursday to maintain the main interest rate at 4%. This decision followed eight consecutive rate cuts that had reduced borrowing costs by three percentage points.

The decision was widely expected by nearly all analysts participating in a Bloomberg survey, as central bankers had previously indicated that they would act cautiously. Consumer price increases have shown signs of slowing towards the bank's target this year. However, sectors that are largely dependent on exports are struggling due to weak demand from Germany. Wage increases in the third quarter exceeded expectations, and officials, including President Ales Michl, have continuously highlighted rising service costs as a potential inflation risk.

According to Vit Mikusek, an analyst at Raiffeisenbank AS, there seems to be a consensus among bank board members that not only the currently rising inflation needs to be controlled, but also future inflation expectations.

This decision indicates that policymakers in Central and Eastern Europe are adopting a more cautious approach compared to other major economies focused on easing. Last week, European Central Bank officials signaled that borrowing costs would continue to decline after implementing the fourth interest rate cut of the year. The U.S. Federal Reserve also executed a widely anticipated rate cut on Wednesday but reduced its forecast for further cuts next year.

Czech National Bank President Michl will address reporters at 15:45 Prague time. The main focus is likely to be potential signals about whether interest rate cuts will resume at the next meeting in February.

Money market prices indicate that investors have significantly decreased their expectations for further cuts, projecting approximately 50 basis points of easing for the next year.

Analysts at Komercni Banka AS have provided a more dovish forecast ahead of the December meeting, predicting quarter-point cuts at each of the first four meetings next year. This would bring the benchmark interest rate down to 3% by June. Komercni Banka analyst Jaromir Gec stated, "In our view, inflation will slow to around 2.5% in January and will average 1.8% next year." He also suggested that the economic recovery may be more moderate than the central bank expects.