Central Bank Holds Rates Steady as Inflation Cools But Wages Stay Sticky

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The central bank’s governing council held its policy rate steady at 3.75 percent on Thursday, the third consecutive meeting at which the rate has been unchanged, citing a continued slowdown in goods inflation but flagging persistent pressure in services and wages as the principal concern going into the second half of the year.

In a statement accompanying the decision, the council said the disinflation process was “proceeding broadly as expected” but that the path back to the two-percent target would be slower and more uneven than the path away from the peak. The statement singled out services inflation, which has remained above four percent for nine consecutive months, and wage growth in the public sector, which has accelerated modestly in the most recent quarter.

The case for holding

Officials who spoke on background after the decision pointed to three reasons for staying on hold. Goods inflation has fallen to within a percentage point of target, helped by lower energy prices and a stronger currency. But services inflation is stickier than the bank’s own models predicted six months ago, and recent wage settlements in two large sectors have come in above the bank’s own expectations.

The third reason, several officials noted, was the lagged effect of the tightening already in the system. With the policy rate having been at or above its current level for over a year, the full impact on demand — particularly on credit-intensive sectors such as housing and capital investment — has not yet been felt.

The case for cutting

A minority on the council, including at least one regional president, had argued for a 25-basis-point cut, citing the cumulative effect of restrictive policy on smaller businesses and the rising number of corporate insolvencies in interest-sensitive sectors. The argument did not carry the day, but the language of the statement was noticeably more balanced than at the previous meeting, where the focus was almost entirely on upside risks to inflation.

What markets heard

Bond yields edged lower after the decision, with the two-year benchmark falling four basis points, suggesting that markets had positioned for a slightly more dovish statement than they received. The currency was little changed. Equities were mixed, with rate-sensitive sectors such as real estate and consumer discretionary outperforming banks.

What to watch next

Three data points will determine whether the council moves at the next meeting. The wage settlement data for the current quarter, due in three weeks. The services inflation print for the most recent month. And the autumn fiscal package from the government, which markets are watching closely for any signal that the fiscal stance is moving in a direction that might require the bank to compensate.

The next meeting is scheduled for the second week of next month. The council has not pre-committed to any particular path, but the statement’s slightly more balanced tone leaves the door open to a cut later in the year if the data cooperate.

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Central Bank Holds Rates Steady as Inflation Cools But Wages Stay Sticky

By AMG News Editorial Team · · 3 min read
Central Bank Holds Rates Steady as Inflation Cools But Wages Stay Sticky

The central bank’s governing council held its policy rate steady at 3.75 percent on Thursday, the third consecutive meeting at which the rate has been unchanged, citing a continued slowdown in goods inflation but flagging persistent pressure in services and wages as the principal concern going into the second half of the year.

In a statement accompanying the decision, the council said the disinflation process was “proceeding broadly as expected” but that the path back to the two-percent target would be slower and more uneven than the path away from the peak. The statement singled out services inflation, which has remained above four percent for nine consecutive months, and wage growth in the public sector, which has accelerated modestly in the most recent quarter.

The case for holding

Officials who spoke on background after the decision pointed to three reasons for staying on hold. Goods inflation has fallen to within a percentage point of target, helped by lower energy prices and a stronger currency. But services inflation is stickier than the bank’s own models predicted six months ago, and recent wage settlements in two large sectors have come in above the bank’s own expectations.

The third reason, several officials noted, was the lagged effect of the tightening already in the system. With the policy rate having been at or above its current level for over a year, the full impact on demand — particularly on credit-intensive sectors such as housing and capital investment — has not yet been felt.

The case for cutting

A minority on the council, including at least one regional president, had argued for a 25-basis-point cut, citing the cumulative effect of restrictive policy on smaller businesses and the rising number of corporate insolvencies in interest-sensitive sectors. The argument did not carry the day, but the language of the statement was noticeably more balanced than at the previous meeting, where the focus was almost entirely on upside risks to inflation.

What markets heard

Bond yields edged lower after the decision, with the two-year benchmark falling four basis points, suggesting that markets had positioned for a slightly more dovish statement than they received. The currency was little changed. Equities were mixed, with rate-sensitive sectors such as real estate and consumer discretionary outperforming banks.

What to watch next

Three data points will determine whether the council moves at the next meeting. The wage settlement data for the current quarter, due in three weeks. The services inflation print for the most recent month. And the autumn fiscal package from the government, which markets are watching closely for any signal that the fiscal stance is moving in a direction that might require the bank to compensate.

The next meeting is scheduled for the second week of next month. The council has not pre-committed to any particular path, but the statement’s slightly more balanced tone leaves the door open to a cut later in the year if the data cooperate.