MNI CNB Review - March 2023: Pushing Back Against “Premature” Rate-Cut Bets

Executive Summary:

• The CNB kept interest rates, FX regime and forward guidance unchanged, in line with expectations.
• The accompanying statement explicitly pushed back against excessively dovish market pricing.
• Governor Ales Michl doubled down on FX rhetoric, noting that the Koruna could be even stronger.

MNI CNB Review - March 2023.pdf

In line with virtually universal expectations, Bank Board voted to keep interest rates unchanged and maintain its commitment to prevent excessive fluctuations in the Koruna exchange rate, while sticking with a formal neutral to hawkish bias. The vote split suggests that new members toed the line of the majority camp and backed the strategy of keeping interest rates stable. However, the Bank Board doubled down on the importance of a strong Koruna exchange rate and tuned up its hawkish rhetoric, as it continues to wrestle with market participants betting on the easing cycle starting as soon as this year.

We interpret the CNB’s statement and press conference as raising the risk of a delay to the beginning of the rate cut cycle relative to market expectations. Already in our preview, we flagged that the CNB might continue pushing back against “overdone” rate-cut bets in the wake of Deputy Governor Zamrazilova’s recent comments to that effect. The CNB’s rhetoric sets the bar high for commencing the rate-cut cycle. In line with Zamrazilova’s comments, we may have to wait until the autumn release of Q2 wage data to get more clarity on its timing, as most Bank Board members see a potential wage-price spiral as a key risk to the interest-rate outlook.