MNI CNB Preview - May 2024: Another Half-Point Cut On Cards

Executive Summary:

• Unanimous sell-side call for a 50bp cut defies slightly less dovish market pricing.
• New forecast may show lower CPI path, better GDP outlook.
• The CNB will comment on its research into the neutral interest rate.

Full preview including summary of sell-side views here:

MNI CNB Preview - May 2024.pdf

Another 50bp reduction to the two-week repo rate (currently at 5.75%) is the most likely outcome of the Czech National Bank’s (CNB’s) monetary policy meeting this week, despite some hawkish overtones in recent communications from several Bank Board members. Although the koruna remains weak relative to the previous forecast and persistent price pressures in the services sector continue to pose a risk, Czechia’s restrictive monetary policy parameters are out of sync with overall robust disinflationary momentum, which saw headline CPI stabilise at the CNB’s +2% Y/Y target for two consecutive months. The focus will be on all the supplementary information accompanying the rate decision – including the updated macroeconomic forecast, some details on the CNB’s ongoing research on r*, and verbal guidance from Governor Aleš Michl.

This rate decision will come with a fresh set of macroeconomic projections, which are expected to show a lower CPI path and a better GDP outlook. The forecast for the koruna exchange rate may be tweaked, given the reluctance of EUR/CZK to fall below the 25.0 figure (February forecast showed it averaging at 24.70 in Q1 and at 24.65 in Q2). However, the highlight of the analytical material compiled by CNB staff for the upcoming meeting will be their findings on r*. Board members had previously communicated that the neutral interest rate may be higher than in the pre-pandemic era when it was seen at around 3%. In an interview earlier this year (March 7), Jan Prochazka suggested that it may have increased to around 3.5%-4.0%, but later (April 18) played down hopes for a precise estimate, noting that the conclusions of ongoing research may not be presented in the form of a specific number. In any case, fresh comments on r* have the potential to influence market expectations surrounding the trajectory and terminal level of interest rates in Czechia.