The main two-week repo rate will drop by 0.25 percentage points to 4.50 percent from Friday, the seven-member banking board of the CNB unanimously decided on Thursday.
Each of the previous four monetary meetings of the Bank Board brought a reduction in the two-week repo rate by 0.5 percentage points, only when the CNB started the easing cycle last December, it reduced rates by the same step as on Thursday – i.e. by 0.25 percentage points.
With its decision, the central bank fulfilled the market’s expectations – a slower rate drop was predicted by all analysts contacted by the news agencies Bloomberg and Reuters. Respondents to the ČTK poll came to a similar conclusion.
“The impact of today’s CNB decision on the market will be diverse. Given that part of the market expected a more significant drop in rates, today’s decision will probably lead to a slight strengthening of the koruna exchange rate,” said Jakub Seidler, chief economist of the Czech Banking Association.
“At the same time, the decline in long-term interest rates should moderate. They began to fall faster in July and are currently at their lowest level this year. It is this drop in market rates that opens up more room for a drop in mortgage rates than today’s CNB rate cut itself,” said Seidler.
Slower growth this year, faster next year
Along with the rate decision, the central bank also released a fresh update to its macroeconomic forecast. According to her, the Czech economy will add 1.2 percent this year, and should therefore grow more slowly than the CNB predicted in May, when it saw this year’s rate of GDP expansion at 1.4 percent.
A more favorable inflation outlook also speaks in favor of a slower reduction in interest rates. The central bank sees this at an average of 2.2 percent this year instead of the 2.3 percent predicted in May.
However, Governor Aleš Michl did not want to comment on the future development of interest rates at the press conference.
“I wouldn’t want to comment too much on that… we’re keeping everything open, we don’t want to hint at all into the future where interest rates will go,” Michl said.
As for the possibility that inflation could even “undershoot” the CNB’s two percent inflation target in the coming months, according to Michl, this is nothing that should worry the Bank Board in any way.
“I would rate (Thursday’s move) as a hawkish cut in interest rates. There were zero interest rates here for a long time. Inflation was above target for most of the previous governor’s term… A slight undershoot of the inflation target is slightly welcome,” said Michl.
His predecessor at the head of the CNB, Jiří Rusnok, served as governor from 2016 to 2022. Aleš Michl first joined the bank board as an ordinary member in December 2018.
Inflation in the Czech Republic has been moving at values that for the central bank mean the fulfillment of the inflation target since the beginning of this year. In June, after a short fluctuation, inflation even returned exactly to the target, when it was 2.0 percent.
ČSOB analyst Dominik Rusinko pointed out before Thursday’s meeting of the bank board that if the CNB were to cut rates more sharply, it would particularly affect the exchange rate of the koruna, which could easily rise above the level of 25.50 per euro, which it tested last week. After the council’s decision, however, it strengthened to the level of 25.30 crowns per euro.
