Czech National Bank Preview: The governor strikes back

On Thursday, 4 August, the CNB will hold its first monetary policy meeting under the leadership of a new governor and with a new composition of the board, including the presentation of the central bank's new forecast. Not much has changed in our view since the last meeting at the end of June. We believe the new governor will deliver what he promised when he was appointed, and interest rates will remain unchanged for the first time since the first post-Covid rate hike in May last year.

The new forecast will, in our view, deliver a less hawkish outlook than we have been used to in the past, but should still point to further rate hikes. The main reason for this should be a shift in the peak of inflation from the summer to the autumn months at 20% year-on-year and a higher trajectory for the rest of the year. In addition, the upward revision to the GDP growth forecast should be in place. The first quarter was a significant positive surprise, and the second quarter does not suggest numbers as bad as the CNB expected in its May forecast. We can also probably expect several alternative scenarios, as in the May meeting, including a scenario with a more distant monetary policy horizon, which should support the Board's decision not to hike rates and to tolerate inflation for a longer period of time.

However, similar to May meeting, communicating more views and making decisions based on alternative scenarios may be confusing for the market, and in addition, compared to May, the factor of a new governor and board members with unanchored views will also play role. Thus, we expect a dovish outcome of the press conference highlighting geopolitical and economic risks, including the reasons we have heard from new board members in recent weeks such as slowing or falling credit activity in some segments or a drop in retail sales.

The CNB continues to intervene in the FX market to defend the koruna, which we estimate has cost it about 11% of FX reserves since mid-May. Although pressure on the weaker koruna has eased in the past two weeks, we expect confirmation of the CNB's dovish transformation and stable rates to revive pressure on the depreciation.

On the domestic front, this will be compounded a week later by the release of July inflation, which we believe will show the full force of the summer's household energy repricing. We could very easily see an upside surprise, which could soon give the Board a hard time. However, we think the pressure on the koruna and the associated cost of FX intervention will be key. In this case, however, the geopolitical risks are not playing into the CNB hands, which could very quickly trigger another EM currency sell-off as we saw in early July. Thus, a rapid rise in the cost of interventions could ultimately drive the CNB to hike rates and end or change its approach to FX intervention from the current commitment-style to a more flexible approach. For now, however, we see this as an alternative scenario albeit with a high probability. The baseline scenario assumes rates remain stable for the rest of this year. However, next week the CNB should show us more on how serious it is about its dovish stance.