MNI CNB Review - December 2023: All On Board

Executive Summary:

• The Bank Board reduced rates for the first time since May 2020.
• All seven members voted in favour of a 25bp cut.
• Governor Michl warned that they could pause if inflation is sticky.

MNI CNB Review - December 2023.pdf

The Czech National Bank (CNB) lowered interest rates by 25bp, starting the monetary easing cycle. Consensus and market pricing were leaning that way, even as most analysts stressed that it was a close call between a cut and a hold. The decision was taken unanimously, which may have been a surprise. The statement framed the decision in cautious terms, noting that monetary easing could be “paused or terminated” if the pace of disinflation falls short of the forecast. However, there seems to be general understanding that it opens the door to a cycle of interest rate cuts, which the Bank Board had been delaying in order to ensure that inflation will return to the target in a sustainable manner.

The evolution of price dynamics in January will be an important determinant of monetary policy in 2024. Unfortunately, January CPI report will only be released a week after the CNB’s next monetary policy meeting scheduled for February 8. The CNB’s reaction function implies that the response to uncertainty will likely be to err on the side of caution and adjust rates in small increments at least until there is more evidence that inflation is headed below the target.

After firing the starting pistol on its rate-cutting cycle, the CNB seems ready to follow through. We think that another 25bp rate cut in February is the most likely scenario, due to the Bank Board’s preference for proceeding in a cautious, gradual manner. The January CPI report will shed more light on the future rate path by way of providing more information about the outcome of the traditional repricing of goods and services at the beginning of the new year.