CNB’s key repo rate:
Actual (June): 1.50%
The Czech National Bank surprised leaving interest rates unchanged. We will have to wait for reasons of this step until the press conference later today. In short, we believe that reasons for the final cut in the current easing cycle still persist. Maybe, two missing vice governors influenced the outcome.
There was a 60% chance that the CNB would cut interest rates today according to our model of CNB’s reaction function. Inflation is going to touch zero this summer. Then, it will pick up; however, inflation outlook remains benign. Yawning output gap and rising unemployment call for more economic policy support. Fiscal policy is constrained by the deficit close to the threshold of financial markets’ tolerance. Monetary policy is, thus, only remaining tool, how to alleviate the economy. Unfortunately, purely working tool. CNB cut its base rate by 225 bps in last 12 months, but rates for new corporate loans decreased only by 119 bps, mortgages are at the same level as year before and rates for consumer credit even increased by 75 bps. But, this lends support for a more aggressive approach. We still guess there is one more rate cut in the pipeline.