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Czechs Face Dilemma on Size of Interest Rate Cut

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(Czech Statistics Office)

(Bloomberg) -- Czech central bankers might slow the pace of monetary easing as they weigh lingering inflation risks and koruna depreciation against weaker than expected economic growth.

All 23 analysts polled by Bloomberg expect the central bank to cut the key interest rate by a quarter of a percentage point to 4.5% on Thursday. Still, money-market prices show a substantial portion of investors are positioned for a fifth consecutive half-point cut.

Policymakers in Prague signaled in June that persistent price pressures and a nascent economic recovery would likely prompt a slowdown in rate cuts. But since then, retail sales, inflation and gross domestic product have all come in below expectations, boosting the case for the central bank to stick to rapid monetary easing.

“The data are dovish at the margin for monetary policy, as growth was materially weaker than the CNB’s forecast,” Goldman Sachs Group Inc. analysts led by Kevin Daly said in a note. “We expect the bank to slow its cutting pace from 50 basis points to 25 basis points at its policy meeting on Thursday, but we think there is a risk of a 50 basis-point cut.”

The rate announcement is scheduled for 2:30 p.m. in Prague, followed by Governor Ales Michl’s news conference at 3:45 p.m.

Daly and colleagues expect the central bank will lower the rate trajectory in its fresh quarterly forecast to reflect the recent softening in gross domestic product and inflation data and expectations for lower European Central Bank rates.

Comments from Czech policymakers have been mixed this month. 

While Central Bank board members Jan Prochazka and Tomas Holub told local media they saw a quarter-point cut in August as more likely, Vice Governor Jan Frait said in a Bloomberg interview that he couldn’t rule out another half-point reduction.

Despite the anemic economy, some central bankers worry that inflation might flare up again, after it dropped to the 2% target in June. 

They cite as the risk factors a still-elevated price growth in services and housing, a weak koruna and a potentially looser budget policy in the election year 2025.

While second-quarter GDP came in lower than analysts and the central bank estimated, it still showed a slightly faster growth than in the first three months of the year.

“That may be psychologically important for the board members,” CSOB AS analyst Dominik Rusinko wrote in a note. “That’s why we still believe that central bankers will rather lean toward a more conservative 25 basis-point rate cut on Thursday, although the decision may not be unanimous.”

--With assistance from Barbara Sladkowska.

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