Czech central bank cuts key interest rate to 3.75% as inflation stays higher than expected
The cut, which had been predicted by analysts, brought the interest rate down by a quarter of a percentage point to 3.75%.
The bank started to trim borrowing costs by a quarter-point on Dec. 21, 2023 to boost the economy. Further cuts of half a percentage point followed last year on Feb. 8, March 20, May 2, and June 27. Cuts of a quarter of a percentage point came on Aug. 1, Sept. 25 and Nov 7.
Inflation was at 2.8% year-on-year in January, the preliminary data by the Czech Statistics Office indicated on Thursday. It was down by 0.2%, compared with December but still higher than the rate of 2.6% predicted by analysts.
The bank's target is 2%.
The size of the Czech economy was 1.0% up in 2024 compared with the previous year, according to the Statistics Office.
The European Central Bank, which sets interest rates for the 20 countries that use the euro currency, lowered its benchmark rate by a quarter percentage point to 2.75% on Jan. 30. Eurozone countries are struggling to grow as consumers burned by inflation warily eye price tags and businesses try to navigate political turmoil in the zone's leading economies, France and Germany.
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00:00 To what extent are we going to see the tariff impact then filter through in the PMI data later today? We think that a fall in the new orders component of the manufacturing PMI, which is a chunky 30%, will have fallen in August because many will have held back from making new orders or even pulled back certain orders, certainly because tariffs have risen, but also because there's confusion in certain sectors over whether or not tariffs have actually come in yet. So for now, we think that actually the eurozone composite PMI is going to fall today, showing that the first hints that actually, you know, there's been quite a decent hit from the tariffs on the eurozone economy. These are the first economic indicators for us for August. Okay, so the hit is there, and we're expecting to see that from the PMI data later today. In terms of the tariff impact on growth with new orders in focus for you and the team, Alan. What about the inflation story for an ECB that has got to that 2% target? How convinced are you that we stay at 2% when it comes to eurozone inflation through the end of this year? Data yesterday confirmed that inflation held steady in July of 2%. But for now, we think that inflation is going to start rising. To your end, there's base effects that will turn and energy and food inflation is likely to continue to creep higher. The only thing that we see is a slight fall in the corn August before it also joins an uptrend. So at the end of the year, we have the headline, the eurozone inflation rate at just over 2.5%. Still, we think that the ECB will probably cut in September, at least for now, and that's because we see a the slight fall in the core rate in August, which is the latest numbers that the ECB Governing Council will see at that September meeting. And also because we see vulnerability in markets and vulnerability in the U.S. economy. Yesterday, Christine Lagarde, in a speech at the World Economic Forum, made it clear that the new E.U. U.S. trade deal will have to be factored into the ECB's September forecast. And, of course, in its latest forecast in June, had the tariff rate at five percentage points lower than that's been agreed. So it is very much likely that the ECB will have to pull down its GDP forecasts for the second half of this year. Okay. To be clear about Annie, because this is not a consensus, call your counter consensus with this call that the ECB will cut again in September. And for you, that's because the focus will be on less on that inflation pick up that you forecast and more on the economic slowdown. Yes, that is correct. And because we have the core coming down and that's again, it's based on fact driven, but we do have the core coming down after it's been stuck at 2.3% for three months, slightly down to 2.1% in August. So that's just sort of alleviate some concerns that there's entrenching going on here. What is all of this doing, the tariff impact to the labour markets of the eurozone? We're spending a lot of our time right now trying to gauge the health of the US labour market in terms of how the Fed is going to be factoring that into its next rate rate decision. And maybe Japan will talk about that on Friday. How resilient is the eurozone labour market to 15% tariffs? But the labor market has been extremely solid. I mean, it went through COVID without there was an increase in the unemployment rate, but it came down very quickly. And that's a testament to government help that was put through in Europe, largely short time work schemes which ensured that many people stayed on their wages. These schemes are still in play now, and so if the economy is hit hard again, most firms will probably turn to them and. It's unlikely that we're going to see such an increase in the unemployment rate. Definitely not anything to the extent that we expect in the US. The eurozone labour market is very much continuing solidly. Okay. Solid, resilient labour market in the eurozone. Before we let you go, Melanie, then as you project out to 2026 and you factor all of these different elements into your forecasts, what is your current view in terms of the growth picture for Europe next year? So after we see GDP declining somewhat in Q3 this year and then only rising by 0.1 in in the fourth quarter, we then have growth actually picking up quite substantially next year. And that is part of the reason why if the ECB goes ahead with our call and cuts rates to the deposit rate to 1.75 in September, we actually have factored in two rate hikes next year because growth is going to pick up and so is inflation.
