Czech Rate-Hike Drive Cools on Risks Abroad: Decision Day Guide

(Bloomberg) -- One of Europe’s last central banks to raise interest rates is about to show exactly how much the global economic slowdown has blunted its zeal for monetary tightening.

As the economic expansion slows around the world and policy makers in the U.S. and the euro area respond with stimulus, their Czech counterparts are discussing whether or when they might be able to resume raising borrowing costs.

They’re expected to make no policy changes on Wednesday amid a dilemma created by conflicting domestic and foreign economic forces. While strong consumer spending and rising housing costs are keeping inflation well above the central bank’s goal, key manufacturing industries are already feeling the weakness abroad.

“Foreign demand is likely to continue to limit hawks,” said Citigroup Inc analyst Jaromir Sindel.

Czech Rate-Hike Drive Cools on Risks Abroad: Decision Day Guide

The decision will follow regional peer Hungary’s partial reversal on Tuesday of monetary tightening steps from earlier this year. Keeping the Czech benchmark at 2% would mean the third consecutive meeting without a change after the key rate hit a 10-year high in May.

The latest staff forecast outlined a rate hike for this year, followed by reductions in 2020. But the bank’s self-declared preference for smoothing the path of borrowing costs means they may stay unchanged for at least three quarters.

Czech Rate-Hike Drive Cools on Risks Abroad: Decision Day Guide

The recent dovish turn by the U.S. Federal Reserve and the European Central Bank has prompted some money-market investors to bet that the Czechs will join them. Bank of America Corp. last month predicted a quarter-point reduction in the main Czech rate the start of 2020.

But board member Tomas Holub countered such expectations last week, saying the discussion will still focus on whether to hold or raise. Rate cuts at some point in the future can’t be ruled out, but the likelihood was lower than money-market bets suggest, he said.

The Czech central bank may not need to cut rates throughout the slowdown if the global economy doesn’t deteriorate further, the koruna remains relatively stable and fiscal policy provides stimulus, according to Holub. The bank may then resume raising once the European economy recovers.

The Czech currency offers one of the arguments for staying pat on rates. It’s about 1.3% weaker than the central bank forecasts for this quarter, effectively easing conditions by boosting the competitiveness of Czech exports and making imports more expensive.

“The combination of stronger-than-expected inflation and a weaker-than-expected koruna exchange rate implies the need for higher interest rates,” Goldman Sachs Group Inc. analyst Kevin Daly said. “We expect the CNB to look through these pressures to tighten and to leave rates unchanged.”

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