By Jan Lopatka
PRAGUE (Reuters) – The Czech central bank will begin debating lowering interest rates as soon as this autumn as it expects inflation to drop sharply particularly at the beginning of next year, Vice-Governor Jan Frait said on Tuesday.
Frait said the latest data took chances of further hikes off the agenda for him and the question was when the bank would start loosening monetary policy after keeping the main repo rate flat at 7.00% since June 2022.
“We are very sure that inflation will drop in a relatively short horizon to really low single-digit levels,” Frait told Reuters. “It is clear from (the outlook) that interest rates, ours and in the market, will follow this development.”
“I would wait for what major central banks do, but the debate (on interest rate cuts) is getting closer and it is without doubt we will get to it in the autumn,” he said in an interview.
Frait was close to voting to raise rates in May and said at the bank’s June meeting that more hikes by major central banks may be a factor for a Czech increase.
But he said on Tuesday any such hikes by others would have to be significant to prompt the Czech National Bank to follow suit, a scenario he said was extremely unlikely.
He said he could not specify for now whether the right time to discuss easing would be at the bank’s late September meeting or the following one in November.
Frait said he expected the drop in inflation to be “really very strong” at the beginning of next year, when the central bank’s forecast sees price growth falling near its 2% target, from 9.7% in June.
He said the bank may change its messaging at the upcoming Aug. 3 policy meeting to remove a reference in the board statement to a possible rate hike at the next meeting.
“The sentence does not have to be there, or we can get into a symmetrical state when the development in the short term will not be skewed in either direction.”
Still, he cautioned against overly-rushed rate cuts, referencing risks especially from the tight labour market and potential un-anchoring of inflation expectations.
These risks are expected to be modelled in one of alternative scenarios to the bank’s baseline economic forecast, to be released after the August policy meeting.
(Reporting by Jan Lopatka, editing by Jason Hovet and Emelia Sithole-Matarise)
