Czech National Bank preview: Stubborn core inflation implies a rate hike
The Czech National Bank (CNB) is anticipated to implement a rate hike next Thursday, fueled by persistent core inflation despite emerging economic headwinds. Per the full note from ING, current indicators suggest that core inflation remains elevated at 2.9% as of May, driven primarily by rising service costs and rent growth. This backdrop of stubborn inflation contrasts with the team's expectation that overall inflation will hover around the CNB's target through November, indicating a nuanced approach to monetary policy challenges ahead.
What the desk is arguing
The desk posits that the CNB's rate hike is more about maintaining credibility in face of persistent inflation rather than an immediate economic necessity. Per the full note from ING, while a split vote is likely, the hawkish tone among some CNB members indicates a desire to act against burgeoning inflation pressures.
Moreover, ING highlights that despite the expected decrease in core inflation over the next year, the current elevated rates, particularly in services, may compel the bank to take a firmer stance. With economic growth projected at 2% this year, the desk maintains that aggressive tightening may overcompensate for transient inflation effects.
Where it sits in our coverage
Our current consensus target for the CNB rate stands at 1.075, with a range expected between 1.04 and 1.12. Cited firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view suggests a moderately aggressive stance compared to others. jpmorgan aligns closely with our target, while bofa is positioned on the lower end of the spread, indicating a divergence in economic outlooks among firms.
How other firms see it
Several firms have reached a consensus around the likelihood of a rate increase, reflecting a general agreement on the need to counter inflation. On the contrary, some, like bofa, express skepticism towards aggressive hikes in light of economic forecasts suggesting slower growth.
Key indicators such as the EUR/CZK and broader inflation metrics will be important to monitor in the wake of the CNB's decision, as they may reflect shifts in trader sentiment and economic forecasts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The CNB is likely to hike rates in response to stubborn core inflation.
- 02Core inflation remains high at 2.9%, driven by services and rents.
- 03Economic growth forecasted at 2% suggests a slower-paced tightening may be warranted.
- 04Market consensus exhibits a split, with some firms expecting more aggressive action than others.
Market implications
Traders should closely monitor EUR/CZK movements as they may respond significantly to the CNB's rate decision. Additionally, the market's interpretation of the bank's future guidance will be critical around the 1.075 consensus level.
Risks to this view
Should economic data trends shift unexpectedly, such as a sharper-than-anticipated slowdown in growth or an easing in inflation rates, the expected rate hike could be reconsidered, leading to possible market corrections.
Articles Czech National Bank preview: Stubborn core inflation implies a rate hike 13:16 Czech Republic Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Czech National Bank will likely proceed with a rate hike next Thursday in a split vote. We don’t consider the Czech economy to be ready for tighter monetary policy, yet hawkish rhetoric – true to Chekhov's principle – makes a hike more likely than unchanged rates. Credibility and independence are in the spotlight this time David Havrlant and Frantisek Taborsky Headline close to target while core inflation still upbeat We are changing our stance when it comes to the next CNB meeting held on Thursday 18 June, as the hawkish communication implies an increase to the policy rate.
Taking on board May’s CPI breakdown and the latest developments in our econometric model’s explanatory variables, we expect headline inflation to hover around target until November. A subsequent uptick should prove temporary, largely driven by base effects from last year, before inflation returns to a more moderate pace by April. Annual core inflation remained elevated at 2.9% in May, but we expect it to ease materially over the coming year.
Considering our economic growth outlook of 2% for this year, we take the position that the underlying inflationary pressures are peaking now and will soften over the forecast horizon. Inflation set to ease next year Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond Still, the persistence of core inflation, driven by elevated price growth in services and buoyant rent growth, represents one of the reasons for tighter monetary policy, loudly heralded by some CNB members. Our conviction remains the same; the current state of the Czech economy and the outlook do not suggest a need for tighter monetary policy, as headline inflation is set to hover around the target at the monetary policy relevant horizon, the core rate is set to decelerate over the next year, the economy is not likely to enter a phase of overheating until the middle of next year, and there are downward risks to economic activity linked to the Hormuz crisis.
Chekhov's gun rule suggests a rate hike Indeed, it is only the recent hawkish CNB communication that makes us change our stance when it comes to the June meeting, seeing a rate hike as a more likely outcome than keeping rates unchanged. Governor Ales Michl has become rather vocal about the need for tighter monetary policy, suggesting that he is willing to raise interest rates even though this could weigh on economic growth. We have been waiting for more balanced views and comments until very recently.
What we have heard instead suggests that, if a rate hike materialises, it could be reversed should policy ultimately prove too restrictive. And it holds in monetary policy that if you have deemed a certain action as appropriate, you should go ahead sooner rather than later, as it takes time for the adjustment to the base rate to kick in, with one to two years considered a full pass through. The intensity of the CNB’s hawkish communication, with repeated references to a rate hike, suggests that the phase of tough talk paired with unchanged rates has passed.
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