(Bloomberg) -- Czech policymakers may consider lowering borrowing costs this year, but any monetary easing will be “very cautious” and most likely happen at a slower pace than investors expect, Vice Governor Jan Frait said.
While central bankers will discuss strategy for future rate cuts in depth next week, they will almost certainly keep the benchmark at its two-decade high of 7%, Frait said in an interview Monday. He added that even if the board agreed to lower rates in a following meeting, money-market bets for about 70 basis points of cuts this year are “very unlikely” to materialize.
“I can imagine that in November or December we might be in a situation where we have a high degree of faith in the forecast and the disinflationary trends, and then it can’t be ruled out that the bank board might still agree to lower rates this year,” Frait said. “I’m unable to predict how likely that is.”
The central bank is trying to strike a balance between a stagnant economy and potential inflationary pressures stemming from a tight labor market and recent currency weakness. While it sees price growth slowing to near the 2% goal early next year, the board will want to keep monetary policy relatively restrictive for longer to ensure inflation will stay low, Frait said.
He echoed other voices at the central bank emphasizing the need to avoid extending a more than four-year-long spell in which inflation exceeded 2% — peaking at 18% a year ago — the worst cost-of-living crisis in three decades.
“Our primary focus now is on inflation expectations and interest-rate expectations, which suggest relatively tighter policy than implied by some standard model simulations,” Frait said. He’d be less worried about undershooting the target for some time than risking inflation running above it, particularly if that were caused by home-grown factors related to consumer demand, he added.
When policy easing starts, it will be “slow and gradual,” he said, signaling that the Czechs will avoid the type of large rate cuts characterized by Poland’s unexpectedly large 75% basis-point reduction this month.
A “fairly tight” labor market, combined with a weaker-than-expected koruna and more expensive oil are inflationary risks that warrant later and more cautious easing than implied by the central bank’s forecast, the vice governor said.
A stronger koruna would be “more suitable” for the central bank, he said. But the recent koruna depreciation is normal in light of signs of a worsening economic situation in the Czech Republic and its main trading partner, Germany.
Even if the the board is convinced that inflation will return to target, it will simultaneously pay close attention to whether investors share that view and whether they believe monetary policy will remain sufficiently restrictive in the longer term, according to Frait.
“We will be very cautious,” he said. “We are in a period when monetary policy is again more art than science. Psychology is very important in this situation, and central banks, including ours, will try hard to reinforce their credibility.”
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