Czech National Bank Review: Rates higher for longer

Unsurprisingly, the Czech National Bank kept its interest rate unchanged in its February monetary policy meeting. Two board members voted for 50bp (very likely Tomas Holub and Marek Mora). The previous hiking cycle finished last June, when the hawkish bank board of CNB Governor Rusnok hiked by 125bp to 7%. Since the start of dovish Governor Michl's term, the new bank board has kept interest rates unchanged.

The new CNB outlook forecasts inflation to pick to 17.6% in January and to decline relatively swiftly from spring towards 7.6% in the last quarter of this year. After a market drop of headline inflation to 2.3% in the first quarter of 2024 the CNB forecast suggests it being mostly flat throughout the whole remainder of the next year. The CNB forecast of GDP shows a shallow recession to end in the second quarter, followed by soft recovery thereafter. Hence the overall GDP growth in 2023 is expected at 0.3%.

The forecast implies additional hikes by roughly 100bp in the first quarter followed by 200bp cuts until year-end. According to Governor Michl, however, the board preferred to keep key interest rates unchanged for longer, having regard to the sensitivity scenario which will be presented on Friday, 3 February. In this simulation, inflation falls close to the inflation target in the first half of next year as well. The Governor said the risk of current FX strength for export performance and economic recovery is given lesser weight compared to the priority to slash inflation back to the target.

The outcome of today's CNB board meeting is an interesting mix of dovish/hawkish stance. Refusing a rate hike suggested by the new forecast on the one hand, and a resolution to keep rates rather higher compared to forecasts on current already high levels for longer period. It seems the possible reduction in interest rates is limited this year, maybe 50bp or less, while the first possible cut could be delivered in August, a symbolic 25bp, while in the fourth quarter we may see another 25bp in November.