November 4, 2019 / 1:37 PM / 4 months ago

Czech rates likely to stay on hold throughout 2020, next move uncertain: Reuters poll

PRAGUE (Reuters) - The Czech National Bank (CNB) is likely to keep interest rates unchanged this year and throughout 2020, despite debate over whether the domestic economy needs tighter policy even as most central banks turn to easing, a Reuters poll showed on Monday.

The central bank is among a small minority in Europe still discussing an interest rate increase, pushing against the grain while the European Central Bank loosens policy to prop up the euro zone economy.

A Reuters poll on the rate outlook until the first quarter of 2021 showed analysts split on whether the Czechs’ next move would be an increase, a decrease, or no move at all.

With the tightest labor market in the European Union, and supported by domestic demand, the Czech economy has yet to feel strong effects from weakening growth abroad, especially in key trading partner Germany.

Rate setters have been performing a balancing act since they last hiked in May, the eighth rate increase since 2017.

The bank voted 5-2 in September to keep rates steady, with two board members supporting a 25 basis point increase to the main two-week repo rate, which now stands at 2.00% CZCBIR=ECI.

Graphic: Czech rate differential, here

All 14 analysts in the poll saw no change coming at Thursday’s meeting.

Of those, eight see the key rate staying unchanged throughout 2020, while five analysts forecast a cut by the third quarter of next year. One did not give an outlook.

Analysts forecasting the bank’s next move would be a hike did not see that move coming until 2021 or 2022.

Generali Investments CEE’s chief economist, Radomir Jac, said Thursday’s vote was unlikely to be unanimous amid a continuing debate over whether to hike rates again.

“I think that both factors, ie domestic and external developments, will neutralize each other in the coming quarters and I therefore operate with the scenario of stable interest rates... for 2020,” Jac said.

Graphic: Czech crown development, here

Most recent comments from central bankers have leaned toward keeping rates steady. Governor Jiri Rusnok said last week the domestic economy was far from recession and balancing contradictory factors implied rate stability.

Central bank board member Oldrich Dedek told Reuters in an interview last week that stable rates could be maintained after inflation eased recently. He said a debate on rate cuts was still far away.

Some say the Czechs may have to loosen next year, even if inflationary pressures keep the central bank hawkish for now.

“Signs that inflationary pressures have eased and weakness in the euro zone has taken a bigger toll on the Czech economy are likely to shift the focus toward easing in the middle of next year,” Capital Economics economist Liam Peach said.

Graphic: Central Europe growth png, here

Reporting by Mirka Krufova and Jason Hovet; Editing by Alex Richardson

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