MNI CNB Review - March 2024: Keeping Eye On Koruna

Executive Summary:

• The CNB voted 5-2 to reduce the two-week repo rate by 50bp.
  
• Governor Michl said that the risks are “modestly” inflationary.
  
• The Governor said that the koruna was given “a lot of consideration.”
  

MNI CNB Review - March 2024.pdf

The Czech National Bank (CNB) reduced its two-week repo rate by another 50bp, in line with consensus, with two dissenting votes cast in favour of a larger cut (75bp). The vote split provided no surprises, with Jan Frait and Tomáš Holub widely suspected to be behind the push for a steeper cut – albeit the identity of the dissenters will only be revealed in the minutes. Although inflation returned to the +2.0% Y/Y target, the central bank maintained its hawkish rhetoric, offering a list of upside risks to the inflation outlook and flagging various areas of concern. Crucially, the movement of the koruna exchange rate was added to the list of inflationary risks. The CNB is expected to continue its rate-cutting cycle in May, when staff will prepare the new macroeconomic forecast as well as a more detailed analysis of the possible change in r*.

After delaying the start of the rate-cutting cycle until the end of 2023, the CNB still has ample space to continue loosening monetary policy, despite its overall hawkish approach. We expect the Czech central bank to sign off on another 50bp rate reduction in May, with koruna weakness and other upside risks to the inflation outlook discouraging most policymakers from accelerating the pace of cuts. On the other hand, at-target inflation outturns and sluggish post-COVID recovery compared with regional peers warrant maintaining the current pace of easing instead of slowing down. The release and discussion of an updated r* will be an important part of the next monetary policy meeting and may inspire a revision of expectations surrounding the trajectory and terminal level of Czech interest rates.