Down, but carefully: How the CNB Banking Board sees the development of rates

Down, but carefully: How the CNB Banking Board sees the development of rates
Down, but carefully: How the CNB Banking Board sees the development of rates

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At its last meeting, the Czech National Bank (ČNB) lowered interest rates again by 0.5 percentage points, this time to 5.75 percent, when five members of the bank board led by Governor Aleš Michl voted for this step.

Two councilors, Frait and Holub, wanted to reduce rates by 0.75 percentage points. Vice-governor Frait already voted for such a procedure at the meeting on February 8, but then he remained alone in the bank board. The CNB has already reduced its main interest rate, which also affects bank loan rates, by a total of 125 basis points since last December.

CNB interest rates have a major impact on loans and mortgages of ordinary citizens, because according to the central bank, all financial institutions change their interest rates. High rates are considered the main tool in the fight against inflation, which was extremely high in the Czech Republic, but on the other hand, they make loans more expensive not only for people, but also for companies that need money for investments. But inflation is now falling, and many analysts expected the CNB to cut rates more than it did in the end.

At the meeting on March 20, Vice Governor Frait argued mainly about the economic situation at home and abroad.

“Frait recommended reducing interest rates by 0.75 percentage point, due to the valuation of the significant decline in monetary policy rates in market rates, subdued domestic demand, deteriorated prospects in relevant foreign economies, and also in view of the relatively high level of interest rates on koruna loans to non-financial businesses,” according to the minutes of the bank board meeting, published by the CNB on Tuesday.

Member of the Bank Board Tomáš Holub joined Fraita with regard to the Bank Board’s communication, which repeatedly stated that it would decide on rates based on fresh data from the economy.

“At the same time, published favorable data on inflation and its core component show that there is no reason to stay with rates ‘behind the curve’. Arguments for a faster drop in rates also include the restrictive effects of fiscal policy this year, in which it is not necessary to maintain monetary policy as strict,” said Holub, according to the minutes.

According to the minutes, the other five members of the bank board spoke in favor of a more cautious approach, especially due to pro-inflationary risks on the forecast horizon, and were also guided by the effort “not to surprise the market”. To add, the monetary policy horizon of the CNB means a period of 12 to 18 months from the given decision, which is the time when any change in the setting of rates should be reflected in the economy.

“The Banking Council assessed the risks and uncertainties of the winter forecast as slightly pro-inflationary. At the same time, most of the significant risks and uncertainties identified at the February meeting persist,” the CNB minutes state.

Inflation in February slowed to 2.0 percent year-on-year from January’s 2.3 percent, and was thus exactly at the level targeted by the CNB. The data for March will be published by the Czech Statistical Office on Wednesday, April 10.

What about the crown?

According to the minutes, members of the bank board also debated the development of the koruna exchange rate. This is weaker compared to the central bank’s latest forecast, which loosens monetary conditions. A one percent exchange rate change is typically estimated to roughly correspond to a 25 basis point move in the main interest rate.

The central bank assumed an average exchange rate of 24.70 crowns per euro for the first quarter. At the same time, the koruna moved below this level, and therefore stronger, only in the first half of January. After that, it began to weaken, and since the second week of February it has been trading above the level of 25 crowns per euro, i.e. at least one percent weaker than the CNB forecast.

In the second quarter, according to the CNB’s forecast, the average exchange rate should be 24.65 crowns per euro, i.e. slightly stronger than in the first three months of the year. Given that the koruna has not even come close to this level yet, according to the general estimate mentioned above, its exchange rate should ease monetary policy.

At the same time, however, the Banking Council is reducing rates more slowly than it would have been according to the forecast, roughly to the extent that the koruna exchange rate deviates from the forecast.

Vice-governor Eva Zamrazilová and member of the bank board Karina Kubelková said at the March meeting of the bank board that the exchange rate of the koruna, along with inflation, will be “an important factor for them in making decisions at the next meetings.”

The article is in Czech

Tags: carefully CNB Banking Board sees development rates


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