Koruna Takes Hit From Below-Forecast CPI Data, Participants Add CNB Rate-Cut Bets

A big miss in Czech CPI data results in a round of dovish CNB repricing, despite recent rhetoric from central bank officials, reaffirming their "higher-for-longer" message. Annual inflation slowed to +12.7% Y/Y from +15.0%, while price change was slightly negative on a sequential basis, with food and non-alcoholic beverages leading declines.

• The CNB will release the official commentary on the data later today but it will be interesting to watch their rhetoric going forward. The central bank has a formal hawkish bias ("June will (...) be very much about whether we will raise rates or keep them unchanged") and recently demonstrated concern about the implications of loose fiscal policy and labour market dynamics.
• The former concern could be addressed as soon as today, with the government set to unveil a fiscal consolidation package and pension reforms. The CNB will closely watch the structure of the package, with Deputy Governor Zamrazilova recently noting that some measures could be anti-inflationary (e.g. cutting state subsidies for companies) but some can be pro-inflationary (e.g. raising indirect taxes).
• Today's CPI data prompted participants to boost rate-cut expectations, with FRA contracts easing across the curve. The 6x9 contracts have now virtually erased gains registered in the wake of a tight vote and hawkish rhetoric at the most recent Bank Board meeting. CZGBs have rallied across the curve and are 10.0-13.9bp better off.
• EUR/CZK last deals +0.064 at CZK23.523 and bulls look for a further move towards May 1 high of CZK23.705. Bears need a pullback under May 9 low of CZK23.340 before targeting Apr 14 low of CZK23.207.