MNI CNB Preview - November 2023: Close Call

Executive Summary:

• This week's decision is a close call between a hold and a 25bp cut.
• Czechia's economy has evolved in the dovish direction since the previous meeting.
• However, the CNB has been wary of cutting rates too early.

Full preview including summary of sell-side views here:

MNI CNB Preview - November 2023.pdf

The economy has been developing in a dovish direction. Inflation declined faster than expected by the CNB, printing at +6.9% Y/Y in September (CNB forecast: +7.2%). Core inflation came in at +5.0% Y/Y, significantly below the +5.5% CNB forecast. Although inflation is expected to accelerate in October, the rebound will be temporary and caused by technical factors (the impact of the energy savings tariff and a waiver of the renewable sources fee). Otherwise, the central bank expects inflation to resume its sharp decline thereafter and reach the tolerance band around the +2% Y/Y target in early 2024. The disinflationary scenario is supported by generally weak economic activity data released out of Czechia (including downbeat advance Q3 GDP outturns published on Tuesday) paralleled by a strong economic downturn in Germany and the eurozone.

However, there are several factors that could persuade the majority of the Bank Board to stay put this week. First, the koruna has extended its depreciation trend since the September meeting. Second, the inflation outlook comes with a great deal of uncertainty. Third, the September decision was unanimous, which sets the bar for an immediate pivot to monetary loosening relatively high. Fourth, Governor Michl warned that core inflation may remain sticky, while the labour market remains very tight.

We see this week’s monetary policy decision as a very close call. Bank Board members are starting their meeting without any firm commitments to either of the two viable scenarios and their sentiment may shift as a result of the internal debate and a closer scrutiny of new staff forecasts (which are not available to us yet). Jan Kubicek gave expression to this sentiment when he said last week that he didn’t know how he was going to vote as “the risks are so conflicting”. Judging by CNB communications from the past few months, it would make sense for the Board to err on the side of caution and wait with cutting interest rates, which is our bias ahead of this meeting – albeit we concede that the scenario involving a 25bp rate reduction is almost equally likely. As things stand, the market prices a 25bp cut and sell-side analysts are almost evenly split (11-10 in the Bloomberg poll).