CNB Review: Catching the market off guard
The Czech National Bank surprised the market today with a cautious hike (0% probability of a hike was priced in). We looked for a hike in May but the move came earlier than expected. Today’s hike is likely to end the CNB tightening cycle. The dilemma now shifts towards whether to stay on hold or cut in the second half of 2020. On the margin, we favour the former
- By a narrow majority of 4:3, the Bank Board decided to raise interest rates by 25bp. For some board members, concerns about higher inflation and loss of CNB credibility prevailed over fears of a slowing domestic economy and other foreign risks.
- Indeed, inflation in the new CNB forecast has been revised up. The CNB expects average inflation of 3.2% this year, compared to 2.7% in the previous forecast. In March, the CNB expects inflation at 3.6% year on year. Inflation is also higher over the monetary policy horizon (1H21), which for some board members could also be an argument to back a hike. As Governor Rusnok mentioned in the press conference, the CNB is primarily an inflation targeter with no dual mandate (compared to the Fed). As such, the inflation outlook is thus the main argument for setting monetary policy.
| 2.25% |
The main CNB 2-week repo rateafter February monetary meeting |
| Higher than expected | |
- The EUR/CZK path remains similar to the previous forecast as well as the interest rate path. The latter still shows cuts in 2H20 - we still think this is premature for the time being. If the developments abroad would indeed further significantly worsen, it is possible to imagine a renewed minor rate cut at the end of the year, but the stability of rates is more likely, in our view.
- If CNB Board members backing a hike thought that the rate cut was in the pipeline, as the forecast suggests, they would probably not vote to hike today, in our view. But what is clear is that the up-to-now the CNB's dilemma about the rate hike or stability is to change towards the decision whether to stay on hold or cut rates later in the year. Stability of rates seems as the most likely scenario for now, however.
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).