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By Jan Lopatka and Jason Hovet
PRAGUE (Reuters) - The Czech National Bank (CNB) has limited room to ease monetary policy this year, with domestic inflation threats warranting caution, and there will be debate whether to keep or cut rates at next week's policy meeting, Vice-Governor Jan Frait said.
Frait told Reuters there was some room for more easing but it was limited after 3 percentage points of cuts since December 2023 that took the two-week repo rate to 4.00%.
"I assume that we are not too far from where monetary policy would start to act truly neutral or slightly supportive, we are about half a percentage point from there," Frait said in an interview at the central bank on Tuesday in remarks agreed for publication on Wednesday.
Frait said rates "could get to 3.5%" in the second half of the year or towards its end "if everything develops as expected" - above the 3% year-end level assumed in the central bank's economic forecasts.
The CNB paused its rate-cutting in December, joining Hungary and others in central Europe, even as the European Central Bank is expected to deliver four more cuts in the first half.
Markets see a strong chance of a 25 basis-point rate cut at the Feb. 6 policy meeting after below-forecast inflation from December. Policymakers will also have preliminary price data for January before they meet.
Governor Ales Michl told the Financial Times in a story published on Wednesday that it was "very likely" the bank would cut interest rates next week, while fellow central bankers Jan Prochazka and Vice-Governor Eva Zamrazilova, also sounded open to resuming the easing path now.
Frait, however, showed more caution.
"I think at this meeting we will discuss staying on hold or a 25-basis-point (cut). I consider both possible." he said.
INFLATION FACTORS
Frait said inflation in the services sector, still at 5% in December, was one reason for caution. He also said he expected the labour market to remain tight despite weakness in the manufacturing sector dependent on German demand.
"We see that, for example, real estate prices are growing in a way that can be interpreted as meaning that some people have concerns about future inflation," he added.
Frait said that in these segments policy was no longer restrictive and "some further easing actually does not really have much logic here."
Headline inflation came at 3.0% year-on-year in December, at the top end of the 1 percentage point tolerance band around the bank's 2% target but below the bank's forecast.
The Czech economy, highly geared toward exports, now faces the threat of U.S. tariffs from new President Donald Trump hitting global trade.
"It could ultimately have anti-inflationary impulses, mainly because Europe would be pressured into cutting costs to be able to compete on prices," Frait said, adding tariffs might force China and other countries to redirect their exports elsewhere including Europe.
(Reporting by Jan Lopatka and Jason Hovet; Editing by Tomasz Janowski)
