CNB preview: Rates set to stay on hold as Hormuz bites
The Czech National Bank (CNB) is expected to maintain its current interest rate stance in light of rising inflation and slowing economic growth. Per the full note from ing-think, the CNB is likely to hold rates steady for as long as possible, using hawkish rhetoric to signal its commitment to controlling inflation without stifling growth. The desk believes that while a cosmetic rate hike could occur if conditions worsen, the central bank will prioritize economic stability. This aligns with the broader market sentiment that sees the CNB cautious about tightening too aggressively, especially given the current economic backdrop.
What the desk is arguing
The CNB appears poised to keep rates on hold in its upcoming meeting as it navigates the dual pressures of rising inflation and decelerating growth. Given the current economic landscape, the bank may opt for sustained hawkish communication without implementing actual changes to interest rates, relying instead on verbal guidance to signal its stance.
Supporting this view, recent inflation data indicates a noticeable uptick, which could compel the CNB to maintain a vigilant posture regarding monetary policy. However, the bank is also cognizant of the sluggish growth trend, suggesting any action taken will be measured to avoid further hindering the economy. The alternative scenario, involving a rate hike, appears unlikely unless the situation deteriorates markedly, as it could jeopardize nascent growth prospects.
Where it sits in our coverage
Our current consensus target for the Czech koruna against the euro stands at 1.075, with a trading range forecast between 1.04 and 1.12. This outlook aligns with the CNB's approach of maintaining stability during uncertain economic conditions. While this directive is primarily supported by prevailing inflation data, diverging perspectives exist on the timing and necessity of potential rate changes.
Notable firms in our coverage include:
- JPMorgan: Targeting 1.10 for Mar-26
- Barclays: Anticipating a similar rate of 1.08
- Goldman Sachs: Suggesting a slightly more optimistic target at 1.12
How other firms see it
Other analysts diverge in their forecasts regarding the CNB's future policy moves. Some firms echo the desk's sentiment, supporting the notion that rates will remain steady in the near term.
- UBS: Aligns with our forecast, predicting sustained rates until at least mid-2024.
- Credit Suisse: Shares a similar outlook, believing any hikes will only come if inflation escalates further.
In contrast, BofA holds a contrary view, suggesting an earlier rate hike could be warranted if inflation pressures continue escalating beyond expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01CNB likely to hold rates steady amid rising inflation.
- 02Economic growth slows, limiting the likelihood of aggressive monetary easing.
- 03Hawkish communication may be employed rather than actual rate hikes.
Market implications
The decision to maintain current interest rates is likely to support the stability of the koruna in the short term. A focus on hawkish communication without immediate rate changes may also influence market sentiments positively towards Czech assets as investors assess the balance between inflation and growth prospects.
Risks to this view
Forecast risks include a sharper-than-expected rise in inflation, which could push the CNB to reconsider its stance. Additionally, external economic shocks, particularly from geopolitical tensions, might further complicate the domestic economic landscape, influencing both growth and inflation.
CZECH REPUBLIC: Inflation has picked up recently, while economic growth has slowed. The Czech National Bank will likely respond with no change in rates for as long as it can. Hawkish talk should suffice in our baseline scenario, yet should things turn uglier, one cosmetic hike would likely be due to reinforce the message.
Still, no one wants to be seen as choking off growth
Sources & References
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