News & analysis

The Czech National Bank (CNB) cut rates by 50bps this afternoon, taking the repurchase rate to 6.25%, delivering more policy easing than we expected and surprising market consensus.

Admittedly, our preview noted that this decision looked like a coin toss, with roughly even chances of the CNB cutting by 25 or 50 basis points. As such, perhaps the biggest shock in today’s decision came not from the headline result, but from the vote split. Not a single Board member voted to deliver a 25bp cut, with the one dissent actually suggesting that 75bps of easing would be preferred. Given today’s dovish surprise and messaging around the decision, we now expect this pace to be maintained over coming meetings. While this does not radically alter our CZK forecast given our base case for a March acceleration anyway, markets have reacted by aggressively selling the koruna in response to today’s decision. EURCZK has climbed almost a full percentage point in the immediate aftermath of the announcement and press conference, with PLNCZK rising even further as the CNB’s dovishness contrasted sharply with more hawkish messaging from the National Bank of Poland’s Governor Glapinski, who also spoke this afternoon.

As we noted in our preview of today’s announcement, there was a significant risk that inflation falls below the upper end of the CNB’s +3.0% tolerance band within the next few months, with the Bank’s view on this key for today’s policy decision.

Specifically, we thought that a faster disinflation path than we expected would tip the balance of risks in favour of a larger 50bp cut at this meeting. It was significant then that inflation was not just expected to fall to 3% soon in the Bank’s eyes, but that it had likely already done so in January. This was notable given the significance of January price resetting to annual inflation figures, with price growth having previously printed at 6.9%YoY in December. In terms of their official inflation projections, the policy statement noted that average inflation is forecast to be 2.6% in 2024 as a whole and 2% in 2025, the former remaining unchanged but the latter being marginally downgraded. That said, policymakers also sounded a note of caution, suggesting that core inflation is expected to be elevated this year, averaging 2.9%, meaning inflation risks skewed to the upside.

Given these perceived upside risks to inflation, the Bank suggested that rates are unlikely to fall as quickly as their macroeconomic models suggest.

Compounding this, Governor Michl suggested that rate cuts may be halted or slowed if necessary, suggesting to us that there is little risk of an acceleration in easing in the coming meetings. Therefore, whilst today’s meeting was a little more dovish than we anticipated, future decisions look set to evolve in line with our base case expectations. We continue to look for 50bp cuts over the next few meetings, with the koruna set to weaken progressively, as market digest CZKs eroding carry position.

 

 

Author:
Nick Rees, FX Market Analyst

 

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