MNI CNB Review - June 2023: Hawkish Minority Shrinks

Executive Summary:

• The CNB kept interest rates unchanged, meeting market expectations.
• Motion for a 25bp hike was defeated in a 5-2 vote (versus 4-3 in May).
• Governor Michl reaffirmed the “higher-for-longer” message.

MNI CNB Review - June 2023.pdf

The Czech National Bank kept interest rates unchanged this week and maintained its commitment to prevent excessive fluctuations in the exchange rate. The motion to stand pat on rates was passed in a 5-2 vote, which saw two dissenters back a 25bp hike, which implies that one policymaker dropped their rate rise call. The Bank Board left the possibility of raising interest rates at the next meeting on the table, guiding that rates will likely remain elevated for longer. Governor Ales Michl continued to push back against “premature” rate-cut bets, signalling the central bank’s resolve in bringing inflation sustainably towards the +2% Y/Y target.

The on-hold decision and a dovish shift in the vote split were widely expected, which explains the limited market reaction to the outcome of Wednesday’s Bank Board meeting. Recent macroeconomic data were broadly disinflationary, while communications from Czech central bankers turned more dovish. This underpinned expectations that at least one of the hawkish dissenters would jump to the on-hold camp, with the case for renewed monetary tightening becoming somewhat weaker. The decision to stick with the existing FX regime also came as no surprise, given this Bank Board’s conviction that koruna strength is a crucial element of its monetary policy – even as according to the most recent data, the central bank has refrained from intervening in currency markets this year.

The Bank Board failed to provide any major surprises this week, with most analysts correctly forecasting the main parameters of the decision. The minutes of the meeting and the concurrent expiry of the CNB’s media blackout (June 30) will allow us to get a clearer picture of deliberations among Czech policymakers. Despite their relatively hawkish comments, we think that the bar to the resumption of the rate-hike cycle is high, with most Bank Board members seeing limited gains from another rate hike. The focus is on the factors that might tip the balance in the rate-setting panel towards easing monetary conditions, as the next move in rates will most likely be down.