CNB decision: off the rate-cutting gas pedal – Commerzbank

The Czech National Bank (CNB) yesterday lowered its key interest rate by 25 basis points. This had been almost certain to happen and was therefore irrelevant for the CZK exchange rates, Commerzbank’ Head of FX and Commodity Research Ulrich Leuchtmann notes.

CZK bulls seem to be right

“There was the indication that the extremely rapid interest rate cuts (from 7% in mid-December to 4¼% now) will now come to an end. Although headline inflation, at 2.4% year-on-year, seems to offer little cause for concern, core inflation, at 3.9%, is still too high, and services inflation, at 6.5%, would give me sleepless nights if I were a CNB decision-maker. A more cautious approach is therefore called for.”

“And there is still a risk that the previous extremely rapid interest rate cuts may have been too much of a good thing. Cutting the key interest rate by 275 basis points in a very short period of time is something you can only do if you are absolutely certain that inflationary pressure has eased significantly. I am always skeptical when central bankers believe they can predict the future with the highest precision. Instead of rapid interest rate cuts followed by a sudden stop, I would prefer a gradual approach.”

“In the end, the CZK bulls may be right. Either because the CNB has coincidentally found the right time to step off the interest rate cutting gas. Or because other central banks make similar mistakes. Or because the CNB is much smarter than I can imagine and can therefore actually control this timing with a high degree of certainty. I am well aware of my possible inadequacies. Let's just hope that the CNB officials are too.”