Czechs stick to stable rates mantra as longer recession looms

The Czech central bank confirmed a preference for keeping borrowing costs stable, defying its new forecast that called for significant monetary tightening.

Policy makers left the benchmark rate at 7%, keeping it unchanged for a third meeting after the bank’s new leadership halted a year of rapid hikes. Officials also reaffirmed their intervention policy of preventing excessive koruna swings, which has helped the currency outperform regional peers this year.

The central bank’s new projections see the economy shrinking 0.7% in 2023, compared with the previous outlook for an expansion of 1.1%. Governor Ales Michl said inflation may accelerate further to around 20% by the end of this year, from 18% in September.

While key global central banks are ramping up rate hikes to bring inflation under control, Michl said the majority of Czech policy makers consider borrowing costs high enough to tame domestic price pressures. The fresh staff forecast implied a “significant” increase in rates now, followed by rapid policy easing next year, he said.

“I prefer above all stable conditions in the economy, so that was I think our main criterion,” he told reporters. “Most of the bank board decided to send a clear message of being that solid anchor that is stabilising economic conditions.”

The two remaining hawkish board members sought a 75 basis-point rate increase. Michl said he expects the next policy meeting to pick between stable rates or a hike.

Data showed this week that surging prices of electricity and natural gas are already forcing households to limit other spending. Also, companies are facing higher costs for energy, commodities and materials, and will therefore limit investments, according to Michl.

Upside inflation risks include faster wage growth, more relaxed fiscal policy and a potential increase in inflation expectations that could trigger wage-price spiral. The main downside risk is the increasing likelihood of a recession at home and abroad.

“The bank board is clearly trying to avoid rate hikes, even if this means inflation will return to the target more gradually,” said Frantisek Taborsky, a London-based strategist at ING Groep NV. “Wage growth and the cost of currency intervention will be key factors for the rate outlook, but we believe the likelihood of further tightening is small.”

—Bloomberg