The Banking Council of the Czech National Bank (CNB) will probably slow down the easing of monetary policy and reduce the base interest rate by a quarter of a percentage point to 4.5 percent. The majority of analysts contacted by ČTK agree on this. The latest data on inflation, which fell to two percent in June, according to some experts however, opens the door for the CNB to repeat the rate cut by half a percentage point, which it has done four times so far this year. CNB Vice Governor Jan Frait did not rule out the possibility of such a step in his media statement, but other members of the bank board were more cautious in their statements regarding the further easing of monetary policy.

"Based on the previous media signals from the members of the Bank Board, we assume that there will be a reduction in interest rates on the traditional quarter of a point, and the Bank Board will slow down the current pace of rate cuts. Although some members will probably continue to support a more significant reduction in rates by half a percentage point, based on the recent lower inflation and generally less positive signals regarding economic growth, the majority of the Bank Board will probably choose a more modest rate cut," said Jakub Seidler, Chief Economist of the Czech Banking Association. "The argument will be the weaker exchange rate of the koruna, continued higher inflation of service prices, and especially the effect of volatile items, which were behind lower inflation in June," he said.

"From August, we expect the rate of interest rate cuts to slow down to 0.25 percentage points at each session this year, and the repo rate should thus drop to 3.75 percent at the end of the year," said Komerční banka analyst Martin Gürtler. "According to the recent statements of its members, the Banking Council does not want to overestimate the favorable development of inflation in recent months. This fits in with the long-term hawkish nature of the bank board's communication, which says it wants to keep rates higher for a longer period of time," he added.

Fingood CEO Vít Endler expects an even more cautious approach from the bank board. "The Czech National Bank is already hitting the brakes and will be cautious with further rate cuts. Now the members of the bank board will decide between whether to cut rates by a quarter of a point or to keep them at the current level," he said. He also does not rule out that interest rates will not change in August.

Portu analyst Lukáš Raška, on the other hand, expects a decision to be made between reducing rates by a quarter and a half percentage point. "For a higher reduction, the figure is based on June inflation, which reached two percent year-on-year. For a lower reduction, on the other hand, the development of the exchange rate of the koruna plays primarily against the euro. "After the very hint that the CNB could lower rates next Thursday by 0.5 percentage point, the Czech currency weakened to the limit of 25.40 crowns per euro," he said.

Cyrrus chief economist Vít Hradil also assumes that the bank board will decide between lowering rates by a quarter and a half percentage point. According to him, the lackluster growth of the Czech economy would also be an argument for a sharper drop in rates. However, the fact that food and fuel, whose development is fluctuating, contributed significantly to the reduction in inflation in June works against this. "As a result, I expect that the advocates of a more cautious approach will win and we will therefore see a reduction of the base rate by 0.25 percentage points to 4.5 percent," he said.

According to Bidli's mortgage specialist Daniel Horňák, a reduction in rates by a quarter of a percentage point is likely. "However, if the data were favorable, a two-fold reduction could also occur. This will be reflected in the rates of savings products again almost immediately. For mortgages, the price of money will depend again," he said.

"If the CNB Board continues to reduce rates, the basic interest rate may even reach 3.75 percent at the end of the year. Rates below four percent are such a magical threshold that not only clients but also developers are waiting for," said FinGo mortgage specialist Jana Vaisová. "I remain convinced that a faster reduction of interest rates to slightly below four percent could have a positive effect on the Czech economy. However, the CNB's statements so far show that there is no will yet for a faster decline in basic interest rates," concluded Tomáš Jícha, Deputy Chairman of the Board of Directors of the ATRIS investment company.

Source: e15
Prepared by the team of foreign office CzechTrade and CzechInvest Seoul