(Bloomberg) -- Czech policymakers voiced concerns about the recent koruna depreciation, saying it was a reason for caution in further monetary-policy easing, according to minutes from the Aug. 1 rate meeting.
The Czech National Bank slowed the pace of interest-rate cuts last week, lowering the benchmark rate by quarter of a percentage point, after four consecutive half-point reductions. The koruna has depreciated about 1% to the euro this quarter, more than other emerging currencies in Europe, and is trading at weaker levels than the central bank had anticipated.
Board members also highlighted persistent growth in the cost of services, while some rate setters also saw a potential inflation risk from fiscal policy next year. Governor Ales Michl said it’s necessary “to persist with tight monetary policy until the core component of inflation was fully under control,” but the minutes didn’t outline a more detailed outlook for the interest-rate path.
Selected points from the board debate:
- Vice Governors Eva Zamrazilova and Jan Frait, as well as board member Jan Kubicek mentioned recent “autonomous easing” of monetary conditions through exchange-rate depreciation and declining longer interest rates.
- According to Frait, markets didn’t appear fully convinced that central banks would succeed in keeping monetary policy tighter than in the previous decade, saying that the Czech National Bank shouldn’t confirm this market view.
- Kubicek viewed the koruna as undervalued, partly because of relatively good foreign trade results, and noted that the currency was apparently becoming an instrument of speculation in relation to peers.
- Zamrazilova, Kubicek and board member Karina Kubelkova said the koruna exchange rate favored a cautious attitude to rate cuts.
- Zamrazilova and board member Tomas Holub also said a large rate cut could – in the context of previous communication – further weaken the koruna and generate new inflationary pressures.
- The board members agreed that the anti-inflationary risk from a greater slowdown in domestic economic activity, showing a “very weak” recovery partly caused by developments in the German economy, had increased substantially.
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