Euro-Area Slowdown Risks Keep Brake on Czech Rate-Hike Binge

(Bloomberg) -- The Czech central bank held borrowing costs unchanged for a second meeting, prolonging a pause as it braces for the impact of a potential economic slowdown in the euro area.

With the European Central Bank facing diminishing prospects of raising its own interest rates this year, its Czech counterpart is trying to augur the disinflationary risks coming from the country’s biggest export market. After a record year of hikes last year, policy makers have become more cautious about monetary tightening even as they still advocate raising the benchmark from current 1.75 percent.

Governor Jiri Rusnok will also present the quarterly update of economic forecasts including the outlook for rates and the currency in the afternoon.

Previous projections envisaged slowing economic growth this year, but also saw strong household consumption creating upward pressure on consumer prices. A weaker-than-expected koruna would normally be an argument for raising rates, but that’s now to a large extent outweighed by external factors, several central bankers said before Thursday’s meeting.

The koruna was little changed at 25.81 per euro at 1:52 p.m. So far this year, it has been about 2 percent weaker on average than the central bank’s forecast for the first quarter.

“Although tight conditions in the labor market and weak koruna have been affecting the economy in proinflationary direction, the external environment poses a risk for the Czech economy, which probably significantly influenced the final decision,” Erste Group Bank analyst Jiri Polansky said in a note.

Data showed that Czech manufacturing worsened more than expected last month, one of the first signs that a slowdown abroad is spilling into the ex-communist country’s reliance on exports. Apart from the impact of weaker euro-area demand, the monetary authority is trying to avoid taking its rates too high above those in the currency zone.

Read more: Bond Markets Signal ECB May Have Missed Its Chance to Lift Rates

Derivatives investors have already begun reducing expectations for rates hikes this year. Forward-rate agreements, an instrument used to bet on future borrowing costs, show the market view is split between just one increase and no change.

The koruna will be an important variable for future monetary policy decision, as its persistent weakness was a major factor behind last year’s five hikes. The central bank will probably again forecast currency appreciation, according to Komercni Banka AS analyst Monika Junicke, who expected more rate hikes in May and August.

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