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Rising Covid Uncertainty Puts CNB Policymakers In A Difficult Position

CZECHIA
  • Market prepares for CNB meeting next week (Nov 4), with policymakers likely to debate whether the central bank should hike by 50bps or 75bps.
  • The CNB surprised the market at its last meeting (Sep 30) by raising the policy rate by 75bps (vs. 50bps exp.) to 1.5% to curb the rising inflationary pressures.
  • As inflationary pressures are expected to remain elevated until at least the end of this year, participants continue to price in aggressive hikes in the coming meetings.
  • Forward rates are currently pricing in another 100bps by year-end (base scenario: 75bps hike next meeting, followed by 25bps hike in December), which would lift the policy rate up to 2.5%, highest level since November 2008.
  • At the same time, Czech government has also reintroduced Covid restrictions amid rising cases, which could lead to a significant downward revision in growth expectations.
  • We have seen that consumer and business sentiment indicators have been falling for month, currently standing at their lowest level since April 2021.
  • First estimate of Q3 GDP will come out on Friday (Oct 29), expected to decelerate to 3.2% YoY (from 8.1% the previous quarter).
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