This week belongs to the central banks. We have to start in Japan. And something has happened there that hasn't happened in 17 years. What was that? The central bankers there decided to raise interest rates. The Bank of Japan raised interest rates from -0.1 % to the 0 to 0.1 1 % band. It was the last in the world to move away from the negative interest rate regime. In our view, this is a bit of a cross to bear. In fact, there is now tuning around the world on how to lower interest rates. In recent years, the Bank of Japan has tried to kick-start a stagnant economy with negative rates, using ultra-cheap money. The upward shift in rates means that it has at least partially succeeded in that goal.
From an economic perspective, the Japanese economy will have to relearn to live in a more normal business cycle. To put that in perspective: For the first time in decades, workers are seeing visible wage increases. And businesses have to remember how to pass on higher costs to customers. In practice, this may not be easy. Japan's economy has become addicted to cheap money. Moreover, we are talking about the country with the oldest population in the world, which is also plagued by mammoth debt. We do not believe, therefore, that Japan will see rapid economic growth in the coming years. Negative rates may return in Japan again.
Although the Czech National Bank's high interest rates may not have been to everyone's taste recently, let's be glad that cheap money is not falling from the sky in the Czech Republic. The Czech National Bank did not surprise today when it lowered the base interest rate (two-week repo rate) to 5.75 per cent - i.e. by half a percentage point. This is exactly in line with a Reuters poll we participated in. Rates at the Czech National Bank are returning to the level they were last at in the first half of June 2022.
Central bankers could not fail to see that consumer inflation had already returned to the Czech National Bank's 2% target and prices at the top of the production chain were in deflation. This called for interest rate cuts of 75 basis points or more. On the other hand, Czech central bankers did not want to sink the koruna, which was already significantly weaker than the Czech National Bank's forecast, by cutting interest rates significantly. The weak koruna, together with the still significant rise in service prices, posed upside risks to inflation. That is why caution prevailed today and central bankers cut interest rates again by 50 basis points. This will soon be reflected in the economy by cheaper credit. But there is worse news for savers on savings accounts and fixed deposits. They will have to invest at a slightly higher risk if they want to maintain the current interest rate on their deposits.
The koruna reacted calmly to today's expected decision by the Czech central bankers, stagnating near CZK 25.30/EUR. This level is in the middle of the band in which the koruna has found temporary refuge over the past 5 weeks.
The dollar has strengthened slightly today to the level of 1.084 USD/EUR. It will be the Fed meeting tonight across the Czech border. Virtually no one expects a change in interest rates today. However, it will be a game of when the process of interest rate cuts will start overseas. The market is currently giving 59% odds that it will be in June. In addition, we are counting on the Fed reducing its estimate of how much it will cut interest rates this year. At the beginning of the year, the market was pricing in the Fed rates going down 150 bps in total this year, but today the market is betting on just 73 bps. Well, that's exactly what's pushing the dollar past earnings.
Markéta Šichtařová
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