Czechs Halt Rate Cuts Again as Defense Plans Add to Price Risks
(Bloomberg) -- Czech policymakers paused monetary easing for the second time in the past three months as domestic inflation risks persist, while global trade and geopolitical tensions cloud the economic outlook.
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The central bank in Prague held the key interest rate at 3.75% on Wednesday, as expected by most analysts. The decision followed a string of rapid-fire cuts last year, a pause in December and a quarter-point reduction in February.
Officials are confronted by conflicting forces, including price pressures in domestic services and housing, weak exports, the prospect of trade wars and plans to increase European military spending.
Inflation is likely to hover in the upper half of the Czech National Bank's 1%-3% tolerance range for the rest of the year, reducing the room for further easing, according to ING Group NV economists David Havrlant and Frantisek Taborsky.
'An improved outlook for economic growth, driven by an expected boost to defense spending, will influence the tightness in the labor market, robust wage gains, and upbeat inflation pressures,' they said in a report before the meeting. 'The renewed convergence requires relatively tight monetary policy.'
Governor Ales Michl is scheduled to comment on the decision and the economic outlook during a press conference starting at 3 p.m. in Prague.
Before the meeting, policymakers expressed concerns about sticky services inflation, faster-than-expected wage growth and the potential impact of debt-financed investment in European defense and infrastructure.
Food prices are another reason for caution. While the central bank would normally look past such volatile items, the recent period of double-digit inflation has made Czech consumers more sensitive to food costs and they have a major impact on their inflation expectations.
Money market prices show bets on less than 50 basis points of easing within the next 12 months. The koruna has advanced 0.5% against the euro this month and potentially more hawkish rhetoric may provide a further boost to the currency.
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