Czech National Bank Preview: No change in the current tone
We expect rates and the FX commitment to remain unchanged. The central bank will present a new forecast including expectations for the key January inflation. Given the upside risks to inflation in the first quarter, we expect the tone of the meeting to be the same as in recent months. In our view, a rate cut discussion will not start until mid-year
| 7.00% |
CNB's key policy rateWe expect no change |
Unclear game changer
On Thursday, the CNB monetary policy meeting is unlikely to bring a change in interest rates. The bank board has kept interest rates unchanged since the last increase to 7% in June 2022. In our view there are currently no strong arguments for the bank board to change their prevailing attitude in keeping rates unchanged at the current level for an extended period.
This is also supported with recent several interviews of board members Karina Kubelkova, Oldrich Dedek, deputy governor Eva Zamrazilova and a newspaper article with Governor Michl. They all stress that the current excessive inflation is mostly driven by supply-side shocks, mainly energy prices and food prices. In their view, the proper response to such developments is not another increase of interest rates. They assume that maintaining the current level of interest rates brings sufficient tightening of monetary policy which should contribute to the taming of inflation to the levels aligned with the goal of price stability, i.e. 2% growth of CPI in the monetary-policy horizon.
What could be a game-changer is unclear. Eva Zamrazilova stressed this could be wage bargaining of labour unions – demanding an increase of wages above 10% year-on-year – which would envisage the increase of inflation expectations. However, she does not expect this now. This information is unlikely before May.
New forecast shows expected inflation for January
The CNB forecast suggests interest rates should be 100bp higher now, and then start to decline gradually as of the second quarter, in order to bring inflation back to the target by the end of 2024. The reluctance of the bank board to follow the recommendation of staff forecast suggests the board will maintain the current level of interest rates for an extended period, instead of the recommended temporary shift, followed by gradual cuts thereafter. Our view is the Czech National Bank will start talks about an interest rate reduction only in mid-year.
More interesting than the decision itself will be the presentation of the new forecast. Given that the economy developed more or less in line with the CNB's November forecast, the main focus will be on the new inflation forecast. While it has surprised significantly to the downside compared to the central bank's last forecast, the main reason is a wrong assumption about the methodological impact of government measures on CPI. On the other hand, adjusted for this effect, inflation surprised to the upside. So the main question will be what number the CNB expects for the key months of January and February. However, we expect a rather higher number, which should keep the same tone of the meeting as in previous sessions.
What to expect in rates and FX markets
Markets are currently pricing in roughly 150bp of rate cuts over a one-year horizon with the first move during the summer months. We believe such expectations are premature and the release of January inflation will provide an opportunity for markets to revise these expectations. We also think the long end is lagging behind the move in core rates and should trade higher. Thus, overall, we see room for the entire IRS curve to move up and bear flattening.
On the bond side, the Ministry of Finance, as we expected, took advantage of favourable market conditions and strong terms to boost its Czech government bonds (CZGBs) offering in January. We expect MinFin to maintain the same pace of issuance in February, which would lead to the issuance of roughly 25% of all CZGBs for this year at the end of February. Such frontloading, in our view, could make CZGBs more expensive in relative terms in the second quarter, conditional on favourable global developments.
In the FX market, the koruna is currently at the strongest levels in more than a decade, driven mainly by falling gas prices and improving sentiment in Europe. Of course, in these conditions there is no reason for the CNB to intervene in the market and we last saw the central bank in the market during the September meeting last year. Although we think market rates have the potential to go up, given the overbought nature of the koruna, we do not believe the CNB meeting has anything to offer in support of the FX. In our view, the koruna has the most long positioning in the CEE region at the moment. Our model suggests a fair value at the moment rather around 24.00 EUR/CZK. Thus, we see risks more towards a correction of current gains. On the other hand, lowering gas prices can move koruna a bit lower again. But in a nutshell, we are hardly looking for a trigger for a move in either direction in the coming weeks.
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