This week focuses on central banks. We start in Japan, where something unprecedented in 17 years has happened: the central bank raised interest rates. The Bank of Japan increased its interest rates from -0.1% to a range of 0% to 0.1%, becoming the last country in the world to exit the era of negative interest rates. In our view, this is somewhat ironic, as the rest of the world is currently focused on how to lower interest rates. In recent years, the Bank of Japan has tried to stimulate the stagnant economy with negative interest rates and ultra-cheap money. The rate hike suggests that this policy has at least partially achieved its goal.

From an economic perspective, the Japanese economy will need to relearn how to function within a more normal economic cycle. For example, employees are experiencing visible wage increases for the first time in decades. Businesses, on the other hand, need to remember how to pass on higher costs to consumers, which may not be easy in practice. The Japanese economy has become reliant on cheap money. Furthermore, this is a country with the oldest population in the world, burdened by a massive debt. Therefore, we do not expect a rapid economic growth in Japan in the coming years. Negative interest rates may return to Japan.

Although the Czech National Bank's high interest rates may not have been universally popular recently, we should be glad that cheap money is not raining down from the sky in the Czech Republic. The Czech National Bank today surprised no one by lowering the key interest rate (the two-week repo rate) to 5.75%, a decrease of 0.5 percentage points. This is exactly in line with a Reuters survey that we participated in. The Czech National Bank's interest rates are returning to the level they were at in the first half of June 2022.

Central bankers could not ignore the fact that consumer inflation has already returned to the Czech National Bank's 2% target, and prices at the beginning of the production chain are in deflation. This called for a reduction in interest rates of 75 basis points or more. On the other hand, Czech central bankers did not want to risk a significant depreciation of the Czech crown, which is already significantly weaker than the Czech National Bank's forecast. A weak crown, combined with continued strong growth in service prices, poses inflationary risks. That is why prudence prevailed today, and the central bankers again reduced interest rates by 50 basis points. This will soon be reflected in lower loan rates in the economy. However, we have bad news for savers with savings accounts and term deposits: they will have to invest in assets with a slightly higher risk if they want to maintain their current interest rates.

The Czech crown reacted calmly to today's expected decision by Czech central bankers, remaining near the level of 25.30 CZK/EUR. This level is in the middle of the range in which the crown has found temporary refuge in the past 5 weeks.

The US dollar today slightly strengthened to a level of 1.084 USD/EUR. Tonight, the Federal Reserve will hold its meeting. Virtually no one expects a change in interest rates today. However, the focus will be on when the process of lowering interest rates will begin in the United States. The market currently gives a 59% chance of this happening in June. In addition, we expect the Fed to reduce its estimate of how much it will lower interest rates this year. At the beginning of the year, the market expected the Fed's rates to fall by a total of 150 basis points this year, but today the market is betting on only 73 basis points. This is what is pushing the dollar higher.

Markéta Šichtařová
nextfinance.cz
Next Finance s.r.o.

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