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UBS on CNB and CZK

CZECHIA
  • The CNB is in a difficult position, with uncertainty added by the choice of a new governor. Inflation has been rising relentlessly.
  • However, as the CNB discussed at its last monetary policy meeting, where it hiked its policy rate by 75bps to 5.75%, it is difficult to deal with external price pressures with interest rate hikes.
  • UBS expects another hike in the policy rate in June, the last meeting under the leadership of Jirí Rusnok. From July, Aleš Michl will take over as the governor.
  • With the full board composition potentially changing further, threatening the hawkish majority, a key backstop for the koruna has been weakened. It still is supported by the interest rate carry advantage over the euro, although the European Central Bank’s eventual tightening measures could invigorate the euro at some point.
  • Risks to UBS view: The war in Ukraine, entrenched global inflation, and intensifying growth challenges could weigh further on the koruna. Domestically, a changed
    CNB board may fail to control inflation.
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  • The CNB is in a difficult position, with uncertainty added by the choice of a new governor. Inflation has been rising relentlessly.
  • However, as the CNB discussed at its last monetary policy meeting, where it hiked its policy rate by 75bps to 5.75%, it is difficult to deal with external price pressures with interest rate hikes.
  • UBS expects another hike in the policy rate in June, the last meeting under the leadership of Jirí Rusnok. From July, Aleš Michl will take over as the governor.
  • With the full board composition potentially changing further, threatening the hawkish majority, a key backstop for the koruna has been weakened. It still is supported by the interest rate carry advantage over the euro, although the European Central Bank’s eventual tightening measures could invigorate the euro at some point.
  • Risks to UBS view: The war in Ukraine, entrenched global inflation, and intensifying growth challenges could weigh further on the koruna. Domestically, a changed
    CNB board may fail to control inflation.