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Inflation at Target Gives Czechs Room to Continue Rate Cuts

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Czech inflation was in line with the central bank’s target for a second month in March, cementing arguments for policymakers to keep cutting interest rates.

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Consumer prices rose 2% from a year earlier, the same pace as in the previous month, the statistics office in Prague said on Wednesday. The central bank said the reading was below its 2.9% forecast for the month mainly due to a more pronounced slowdown in regulated prices.

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Faster-than-expected inflation easing this year has opened room for central bankers to slash the official borrowing costs by a cumulative 125 basis points since December to 5.75%, which could help the economy recover from about two years of post-pandemic stagnation. 

Still, Governor Ales Michl has pointed to several risks, including rising costs for services and a weaker exchange rate, which could slow or halt rate cuts if they threaten to push inflation higher again. He has also said the bank is likely to cut rates less than implied in the staff forecast, which sees the benchmark at around 2.6% at the end of the year.

Minutes from the March rate meeting cited Michl as saying that monetary policy needed to remain tight “until the core component of inflation was fully under control.” 

Read more: Czech Finance Chief Says ‘Crisis Is Over’ as Outlook Improves

The core measure, which indicates underlying price pressures stemming from domestic demand, was 2.7% in March, below the 3.3% forecast, the central bank said. Low growth in prices of foreign inputs and subdued economic activity continued to help keep a lid on profit margins for producers and retailers, according to the bank.

“Growth in services’ prices also eased marginally but remains elevated,” it said.

Inflation should be mostly between 2% and 3% this and the next two years, with the expected economic recovery and further growth in cost of services contributing to a slight pick-up, said Jiri Polansky, an analyst at Erste Group Bank AG’s Czech unit, Ceska Sporitelna AS.

Polansky said he sees another half-point rate cut in May as most likely and that the central bank “could return to the standard” 25 basis-point steps after that, adding that the benchmark may be at 4% at the end of the year.

This article was generated from an automated news agency feed without modifications to text.

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