The Czech National Bank was expected to make its first interest rate cut in more than three years on Thursday as policymakers meet amid a backdrop of slowing inflation and a sagging economy.
Markets are pricing in a rate cut on Thursday, and 12 of 15 analysts in a Reuters poll forecast a 25 basis point reduction.
The Czech central bank lifted borrowing costs by 675 basis points to more than two-decade highs between June 2021 and June 2022 as central European policymakers sharply tightened policy to battle inflation surging to double-digit rates.
Since the middle of last year, though, under the new leadership of Governor Ales Michl it has held steady with its key two-week repo rate (CZCBIR=ECI) at 7.00% and maintained a cautious hold in recent months even as the Hungarian and Polish central banks eased policy.
Michl said this month the bank was set to remain hawkish whether it cuts rates now or not.
Central bankers have been wary of companies repricing their goods and services at the start of 2024, leaving an argument to wait until upcoming meetings in February or March before easing policy.
A worry over renewed wage growth in what is one of the European Union's tightest labour markets is another concern.
But economic data has been sluggish. Household spending has dropped and the economy overall declined by 0.6% in the third quarter from the previous three months. It is forecast by the central bank to shrink 0.4% in the full year, and to eke out a 1.2% expansion in 2024.
With global central banks like the U.S. Federal Reserve or European Central Bank calling an end to their own tightening cycles, analysts see the balance shifting to a cut now.
"Global dovish repricing, weaker economic outlook, a lack of inflationary surprise in data since the November policy meeting and... tight balancing by many board members is a combination which speaks in favour of careful cut," said Jakub Seidler, chief economist at the Czech Banking Association.
The board voted 5-2 for unchanged rates in November, with the minority already seeking a cut.
Others could join the call to begin loosening policy.
Policymaker Jan Prochazka, who had backed stable policy in November, told Reuters last week that inflation risks that have prevented the start of easing have been gradually disappearing, and that a cut in December would also be sign of confidence that the January repricing will not be large, and that central bank believes it can deliver low inflation next year.
Vice-Governor Eva Zamrazilova, another who had voted with the majority, told Bloomberg the December meeting was "50-50".
Headline inflation stood at 7.3% in November after hitting a peak of 18% in September 2022 and is forecast to fall back to the central bank's 2% +/- 1 percentage point target range next year.
The central bank will release the rate decision at 2.30 p.m. (1330 GMT) on Thursday and hold a news conference at 3.45 p.m..
