CNB Preview: Rates on hold this Thursday, hikes to come in 2H18

The CNB meeting this Thursday should provide little surprise, as this is the first one since August last year where the consensus is crystal clear. The CNB will stay on hold, as suggested by its February forecast and the dovish rhetoric of CNB Board members. The latest developments in GDP growth, wages and CZK path are in line with the February CNB forecast; only CPI inflation declined more than expected.

CPI is now below the target, reaching 1.8% YoY in February vs 2.2% forecasted by the CNB. But this was related mainly to lower growth in food prices and the high base effects from the last year, when prices accelerated due in part to some oneoffs (electronic sales registration in restaurants). As such, compared to the inflation peak in October (2.9% YoY), contributions of food prices to YoY CPI growth declined from 1.4ppt to 0.4ppt in February and restaurants prices contribution fell by 0.2ppt.

The below-target inflation is convenient for the CNB, as it enables it to communicate its dovish stance more credibly. The CNB wants to sound dovish now to avoid CZK strength driven by hike expectations, as tightening of monetary conditions via FX would leave limited room for interest rate tightening. A higher interest rate is the preferred option for CNB to further escape with rates from the zero-bound.