MNI CNB Review - February 2023: Cutting At Pace

Executive Summary:

• The CNB reduced interest rates by 50bp defying consensus (-25bp).
• The 6-1 vote split was dovish, with one dissenter seeking a 75bp cut.
• Governor Michl said that the CNB sees inflation at +3% Y/Y in January.

MNI CNB Review - February 2024.pdf

The Czech National Bank (CNB) voted 6-1 to cut its two-week repo rate by 50bp to 6.25%, accelerating the pace of its easing cycle at the first meeting of the new year. The sole dissenter called for an even deeper cut, adding to the dovish surprise provided by the vote split. The decision was justified by a decline in headline inflation, which is expected to have touched the upper end of the CNB’s tolerance band in January. Governor Aleš Michl later clarified that FX weakness played no significant role in the Bank Board’s decision, despite the Bank Board’s earlier focus on the koruna exchange rate.

We expect the CNB to continue with its sharp rate cuts (50bp/meeting) at the next one or two meetings. The pace of easing is set to slow to 25bp/meeting when the Board judges that it has entered “the last mile” in its fight against inflation, which would warrant a switch to fine-tuning. Communications suggest that the terminal rate should be higher than the 3% suggested by the staff forecast. The expectation of a higher terminal rate is further supported by the ongoing debate on Czechia’s R* level, with some tentative signals that it might be higher than estimated earlier (3%). The trajectory of easing also depends on the further evolution of the koruna, in our view, albeit the CNB’s reactivity to FX dynamics will be tested in the coming months.