The Czech National Bank (CNB) is forecasting low inflation of approximately two percent in the first half of next year, according to CNB Governor Aleš Michl. He discussed this projection on Partie Terezie Tománkové on CNN Prima News and dismissed the possibility of early interest rate cuts by the central bank in the coming months.

Michl emphasized the importance of the CNB’s strict monetary policy in reducing inflation, which is expected to fluctuate between seven and nine percent by the end of the year but remains relatively high. He stated that maintaining this strict monetary policy will likely yield results, leading to inflation hovering around two percent in the first half of 2024.

However, Michl cautioned against expecting rate cuts in the near future. He reminded viewers that interest rates have been exceptionally low, even at zero, in previous years. He pointed to the period between 2016 and 2017 when a substantial amount of money was printed, a move he considers one of the most significant macroeconomic mistakes in the central bank’s history. According to Michl, this policy has contributed to expensive mortgages and loans and a sluggish credit market. He expressed doubt that money would ever be as cheap as it was during that time.

On the contrary, the CNB’s current policy outlook anticipates higher interest rates over the next five years compared to the previous decade. Michl mentioned that the CNB aims to adopt a more hawkish stance and ensure that core inflation is no longer the highest in the European Union.

Core inflation, which factors out volatile components such as food and energy prices, is expected to remain above three percent. This high core inflation rate currently does not support a case for interest rate cuts. Core inflation figures are adjusted for seasonal influences, changes in regulated prices, tax adjustments, and other administrative measures.

In August, year-on-year inflation eased to 8.5 percent from 8.8 percent in July. Analysts believe that the current data will provide a basis for the CNB to maintain the key interest rate at seven percent during its September meeting. The year-on-year inflation slowdown is attributed to the high base effect from the previous year, although this effect is believed to be diminishing, according to analysts.

Article by Prague Forum