Czech National Bank Review: Restoring price stability is an absolute priority

The CNB decided to hike the key rate by 50 basis points to 5.0%, the highest level since 2001. However, the decision was 25bp below our expectations and led to market disappointment. On the other hand, the press conference delivered a hawkish message and a commitment to raise interest rates further. Unsurprisingly, five board members voted for a rate hike and two for stability. However, more interesting were the details revealed by Governor Rusnok. The staff recommendation was a 75bp hike (which was the ING call) and according to the governor, several board members were willing to vote for this proposal. In the end, however, the prevailing view was to wait for the new forecast at the May meeting and to be more cautious until then. At the same time, the governor said that the CNB's internal forecast suggests GDP growth would be roughly half of the February forecast, implying growth of around 1.5%. However, he later said in a TV interview that he is more sceptical than central bank analysts and personally expects growth to be only slightly above zero for this year. In terms of inflation, nothing in the CNB's outlook has changed from statements made in recent weeks, implying a peak in inflation of around 13% in the spring months and a gradual slowdown in the second half of the year. The governor did not provide more detailed forward guidance regarding future interest rate path, but the Board's statement was very clear.

The governor also sent a clear message on speculation about whether the central bank would intervene in favour of a stronger koruna. In his words, FX as a monetary policy tool has been discussed, but the activity so far in early March has been judged successful and no further action is needed. Of course, the governor reiterated that the CNB is always ready to react to a sharp depreciation of the koruna or high volatility. He also said that the central bank has resumed the FX reserves yield sales programme that was launched in January.

Today's meeting brought no change in our call. We expect inflation to peak in May/June at around 14% year-on-year. Thus, on this assumption, we expect another 50bp rate hike at the May meeting and stability in interest rates for the rest of the year. In our view, March inflation (published on 11 April) will show more, fully revealing the impact of the Ukraine conflict on inflationary pressures in the Czech Republic, which may open the door for more rate hikes this year. Although a possible rate cut was not discussed today, we think it will be the main story for the May meeting with the CNB forecast pointing to a 3-4% range at the end of the horizon.