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Aggressive CNB Hike Continues To Support CZK

CZECHIA
  • The CNB decided to raise its benchmark rate more than expected to 3.75% on Wednesday (pre-GFC highs) to continue its fight against inflation.
  • With inflation expected to remain elevated longer than previously estimated, the terminal rate could be reviewed to the upside (above 4%).
  • However, the uncertainty over the economic outlook combined with the sharp increase in ST rates amid aggressive CNB tightening could weigh on the economic activity in the medium term.
  • One positive thing about the aggressive hike is that it will continue to support CZK against major crosses (i.e. EUR) and therefore help anchor inflation expectations.
  • CZK is the 'less risky' currency among the CEE region, therefore CZK crosses (HUF, PLN) could continue to reach new all time highs.
  • Governor Rusnok added during the press conference that Czech policy rate will reach or exceed 4% at the next meeting.
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