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Aggressive Tightening Increases Recession Risks

CZECHIA
  • With the rising Covid uncertainty, it will be interesting to see if CNB will pause after today's aggressive hike as further tightening could increase recession risks.
  • 2Y10Y Yield curve inverted in October and is likely to become more negative in the near term, approaching its March 2020 lows.
  • We also saw that business and consumer sentiment indicators have been falling in the past few months, currently standing at their lowest level since April 2021.
  • The CEE region has not hesitated to surprise the market in recent meetings to curb the inflationary pressures (inflation is now likely to remain elevated in 2022).
  • CZK has been strengthening following the decision, with EURCZK currently trading slightly below the 25.40 level. Next support to watch on EURCZK stands at 25.33, followed by key level at 25.25.
  • Surprisingly, the move on CZK crosses was not 'massive' given the magnitude of the hike. Even though some sell side firms assign a small probability to a potential 100bps increase, analysts were not expecting a 125bps hike today.
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