MNI CNB Preview - December 2023: Approaching Turning Point

Executive Summary:

• A majority of sell-side analysts expect the CNB to deliver a 25bp rate cut.
• It remains a close call, but communications have turned more dovish recently.
• January repricing of goods and services provides a key source of uncertainty.

MNI CNB Preview - December 2023.pdf

The Czech National Bank (CNB) is heading for another live meeting, with the decision to inaugurate the rate-cutting cycle hanging in the balance. The economy has developed more or less in line with expectations, with disinflation undergoing brief disruption caused by statistical effects, while headwinds to economic activity remain, potentially supporting the dovish case. However, the impact of the traditional repricing at the start of the new year continues to provide a significant source of uncertainty, with policymakers concerned about the implications for the inflation outlook. We think that the odds of the CNB cutting rates this week are close to 50-50 and the course of the meeting may sway the vote one way or the other.

With inflation evolving largely in line with staff forecasts, conditions may be ripe for the first cut of the cycle – especially in the light of a continued stream of weak data from the real economy. Any reduction in rates would likely be accompanied by relatively hawkish rhetoric, with Governor Aleš Michl set to reaffirm his commitment to keeping rates higher for longer and above their historical levels. That being said, it is not a foregone conclusion, with the Bank Board having a multi-month track record of communicating its cautious, hawkish approach. Whether or not the Board cuts rates or not, it will closely monitor the adjustments to price lists at the beginning of 2024.