The Czech central bank (CNB) cut the key policy rate by 25bp to a new record low 0.50% at today’s monetary policy setting meeting.
The decision to cut the main interest rate to 0.50% was in line with our and consensus expectations; however, some market participants expected the CNB to stay on hold. The initial market reaction after the announcement was fairly limited as the Czech koruna has sold off fairly strongly since the beginning of this week ahead of the meeting. At the press conference, CNB governor, Miroslav Singer, said that the board voted 4-3 to cut rates.
Assessment and outlook
Today’s rate cut didn’t come as a surprise to us given the dismal condition of the Czech economy. We have been arguing for some time that the Czech central bank needed to take some action to stimulate economic growth by easing monetary conditions further. After receiving the Q1 GDP data, which showed a contraction of 0.7% y/y, it was clear that the CNB has to cut interest rates sooner rather than later. Even the weakening of the CZK, which has lost over 5% since mid-March, did not prevent the central bank from monetary easing today.
At the press conference following the announcement, Governor Singer said that the risks to the Czech economy are skewed to an alternative scenario, which assumes more government austerity, lower monetary inflation and lower interest rates. A weakening of the Czech koruna is the main pro-inflationary risk at this point. Furthermore, the rate cut received a narrow majority and three board members out of seven voted for stable interest rates. However, this did not surprise us, as some members are clearly afraid of, in our view wrongly, inflationary risks should interest rates go even lower.
Summing up, even though today’s rate cut is clearly good news for the Czech economy, on the other hand it might only have a limited impact and other non-standard monetary policy tools might be needed to spur the economy and to fundamentally turn around the growth outlook. For now, the outlook for the Czech economy looks fairly gloomy and we expect it to contract over 1% this year.