MNI CNB Preview - March 2024: Keeping Pace

Executive Summary:

• Two policymakers revealed their voting preferences: Zamrazilová (25bp or 50bp) & Kubíček (50bp).
• Lingering service price pressures and CZK weakness reduce the odds of a bolder cut.
• Consensus looks for a second back-to-back 50bp rate cut this week as easing cycle continues.

Full preview including summary of sell-side views here:

MNI CNB Preview - March 2024.pdf

Last-minute comments from Bank Board members, just ahead of the CNB’s media blackout period, inspired reflection on market wagers, with remarks from Eva Zamrazilová and Jan Kubíček reducing the perceived odds that the push for a faster pace of rate cuts could muster sufficient support. Consensus (i.e. almost all analysts polled by major news wires) looks for another 50bp reduction in the two-week repo rate, possibly coupled with cautious rhetoric from Governor Aleš Michl. We think that the sentiments of individual policymakers verbalised in their recent communications, persistent koruna weakness, and concerns about lingering risks to the inflation outlook limit the probability of faster monetary easing.

In the current conditions, this will likely result in a 50bp rate cut. The CNB remains in an early phase of its monetary easing cycle, after keeping rates at elevated levels for a relatively long period of time. We think that this week’s 50bp cut will likely be followed by further cuts of that magnitude, until the Board deems it suitable to move to the next phase of the cycle, that is fine-tuning. The exact trajectory of interest rates further down the road may depend on the results of analytical efforts to determine the policy-neutral level of interest rates, with officials signalling that it might be higher than the pre-pandemic estimate of 3%. If this proves to be the case, then the rate-cutting cycle may stop earlier than currently assumed.