MNI CNB Preview - May 2023: Sticking With “Higher-For-Longer” Message

Executive Summary:

• The market is well priced for an on-hold monetary policy decision from the CNB, an outcome expected by all economists polled by major news wires.
• The bulk of latest rhetoric coming from Bank Board members reaffirmed preference for stable interest rates while flagging hawkish risks to the outlook.
• The central bank is set to release the spring edition of its macroeconomic projections but no major surprises are expected on that front.

Full preview including summary of sell-side views here:

MNI CNB Preview - May 2023.pdf

In light of recent hawkish communications, the CNB is expected to stand pat on interest rates and its existing FX regime this week. The Bank Board may also reaffirm its forward guidance expressing readiness to keep interest rates unchanged or raise them if needed, sticking with the formal neutral to hawkish bias. We do not expect any indications of a rate-cut debate being already underway, given that policymakers appear more concerned about upside risks to the inflation outlook than about headwinds to economic growth.

When it comes to outside risks for Wednesday’s rate announcement, the CNB is also more likely to err in the hawkish direction. An incremental rate hike, an option flagged by Czech Banking Association Chief Economist Jakub Seidler, would reinforce verbal pushbacks against what the central bank sees as overdone rate-cut bets. Although we think that a resumption of the tightening cycle is rather unlikely, with the CNB choosing to hold interest rates unchanged even when inflation was on an upward trajectory, the balance of risks remains skewed in the hawkish direction and the Bank Board does not see policy normalisation at the next few meetings as a viable option. That being said, by far the most probable outcome of this week’s meeting is a hold.

This week’s monetary policy decision will be accompanied by the release of the spring edition of the CNB’s macroeconomic forecasts. The updated projections along with the central bank’s rhetoric will steal the limelight if the Bank Board indeed keeps the two-week repo rate unchanged at 7.00%. We do not expect major surprises when it comes to the new forecasts, while the language used by the Bank Board to explain its decision will most likely reaffirm the familiar views of central bank officials.