MNI CNB Preview - June 2023: Stepping Off Brink

Executive Summary:

• The CNB is virtually universally expected to keep interest rates unchanged.
• The case for raising rates has weakened since the tight vote at the Bank Board's meeting in May.
  
• Governor Ales Michl may deploy hawkish rhetoric to push back against rate-cut pricing.

Full preview including summary of sell-side views here:

MNI CNB Preview - June 2023.pdf

The Czech National Bank is highly unlikely to pull the trigger on another interest rate hike. In the weeks since the previous monetary policy meeting, fresh macroeconomic data provided further evidence of ongoing disinflation, while the government unveiled austerity measures intended to curb record-breaking budget deficits. On top of that, latest public communications from Bank Board members suggested that the conviction in continued stability of interest rates has been restored. As a result, we expect the Bank Board to keep interest rates unchanged this week, with a possible shift in the vote split from 4-3 in May this time around, possibly even to 6-1, as hawkish dissenter Tomas Holub maintains his call for a “signalling” hike.

The Bank Board have had several reasons for optimism since the shockingly tight vote for keeping interest rates unchanged seven weeks ago. Meanwhile, the government’s long awaited fiscal consolidation package has inspired hopes for a tighter budgetary discipline in Czechia, soothing the nerves after the CNB flagged loose fiscal policy as a key upside risk to the price outlook. In addition, there has been plenty of CNB speak crossing the wires over the past few weeks, but the most significant change of sentiment was evident in remarks from Deputy Governor Jan Frait, a potential swing voter in the Bank Board. Speaking last week, Frait told Bloomberg that the case for raising rates has weakened since the previous meeting, hinting that he would be more comfortable with maintaining his call for stable interest rates.

On the other hand, the CNB is probably dissatisfied with the extent of the dovish shift in market pricing, which threatens to complicate its efforts to take heat out of the economy. They have a record of pushing back against “premature” rate-cut bets, including in the wake of the previous monetary policy meeting. It is unclear if the tight vote split was a result of genuine difference of opinion, or a carefully crafted communication tool deployed as the market started questioning the central bank’s “higher-for-longer” forward guidance. In addition, the koruna has depreciated by around 1% since the May meeting, even though Bank Board members repeatedly emphasised the importance of a strong currency for their monetary policy approach.