Interview of Jan Kubíček, Bank Board Member
By Jan Lopatka (Reuters 12. 3. 2024)
The Czech National Bank can cut interest rates by 50 basis points again this month as inflation risks have settled and the crown currency has stabilised, policymaker Jan Kubíček said.
With inflation falling sharply, to 2% in February, inflationary risks have shifted down from a previous pro-inflationary assessment, Kubíček said.
"Inflation risks are rather balanced now," Kubíček told Reuters on Monday.
Risks remaining on the pro-inflationary side were a weaker exchange rate and fast-rising prices of services, he said.
The bank cut its repo rate by 50 bps last month to 6.25%, a smaller reduction than had been suggested by its forecast.
"We are leading a debate about the vigour of interest rate cuts, whether to choose the trajectory of a fast decline and then remaining somewhere close to the equilibrium level, or whether to reach the equilibrium gradually," he said.
"The exchange rate development rather leads me towards preference for us choosing the second way, to lower rates gradually, which can mean lowering by 50 basis points at a time."
He said he was likely to back a 50 basis-point cut at the next meeting on March 20. Further decisions would depend on the bank's updated forecast in May.
The crown has weakened by 1.4% against the euro since February's cut, an important factor for an economy widely exposed to the price of imports.
"Inflation figures speak for a faster decline (in rates). But the exchange rate has delivered part of the easing of monetary conditions," Kubíček said.
He said it was important that the exchange rate had stabilised around 25.30 to the euro after dropping to as low as 25.52, versus 24.70 penned in the forecast for the first quarter.
Kubíček said the weakening may have been caused by trades favouring the Polish zloty - as well as the market's surprise at the bank's forecast assumption that interest rates would drop below 3% by end of this year - rather than by the size of the February easing.
He expected the bank to ease at a slower pace, to around 4% by year-end, in line with the board's declared cautious approach after a wave of double-digit inflation in both 2023 and 2024.
Another factor speaking against faster rate cuts was a shift in expectations of policy easing by the U.S. Federal Reserve and the European Central Bank, now seen in June, he said.
He expected the interest rate differential between the crown and the euro to disappear by the end of the year but this may not bring further currency weakness, he said.
While the Czech economy was being hobbled by weak foreign demand, Kubíček expected a rebound of household consumption from a rise in real wages to boost growth above the bank's forecast 0.6% this year.
"I believe the household consumption will have decisive weight, and overall GDP growth this year will exceed 1%."