Czechs Hold Rates as Euro-Zone Slowdown Eclipses Inflation

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The Czech central bank, one of Europe’s last still pondering monetary tightening, left interest rates unchanged for now as risks stemming from the weakness of the euro-area economy overshadowed higher inflation.

Policy makers held a “very balanced” debate, split between holding rates and raising them, Governor Jiri Rusnok told reporters on Thursday. In the end, the board voted to keep the benchmark at a 10-year high of 2%, overruling two members who sought a quarter-point increase.

The decision mirrors the stance applied by rate setters in the European Union‘s eastern wing and contrasts with easing steps taken by the U.S. Federal Reserve and the European Central Bank.

Policy makers in the region are mostly holding off on changing borrowing costs as they evaluate the impact of global headwinds on their economies. Earlier on Thursday, Serbia bucked the trend with a surprise cut.

“The group arguing against raising rates mentioned the fact that the slowdown in western Europe, mainly in Germany industry, is already very visible in our manufacturing sector,” Rusnok said. “We have a number of signals form industrial companies about a significant decline in orders. Some companies are already reducing their production.”

While strong consumer spending has kept Czech inflation above the bank’s 2% goal, the debate centers on the magnitude of the economic slowdown abroad and its impact on export-oriented industries. Policy makers in Prague also weighed new staff forecasts, which outlined faster inflation and slower economic growth for next year.

The projections imply two rate hikes by the end of March, followed by declining rates from the middle of 2020. Rusnok said he preferred to smooth out the rate path.

The exchange rate is also key in their deliberations. After defying predictions for appreciation for the past two years, the koruna was among the three central European currencies that were the biggest gainers among emerging-market peers in October. It strengthened 0.2% to the euro after Rusnok’s comments.

Thursday’s meeting underscored the central bank’s dilemma stemming from the “dual character” of the Czech economy, in which industrial companies are more directly exposed to external developments than the sectors focusing on domestic consumers, Rusnok said.

“The bank board needs to very carefully weigh the subtle differences between following or not following the recommendation of the forecast,” he said.

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net;Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Andrea Dudik

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