After the five hikes implemented last year, the CNB board took a breather at its December and February meetings due to uncertainty over the external environment, and in particular Brexit chaos and a weak German economy. Thus, while the last CNB staff forecast assumed a hike in the first quarter of the year, the board decided after a lengthy discussion that another rate increase would not be appropriate. The stream of data out of the domestic economy has been relatively pro-inflationary since the last meeting. Inflation surpassed CNB’s expectations, with notably core inflation surprising on the upside, and GDP growth confirmed that the Czech economy remains resilient to the slowdown in Germany. Meanwhile, the EURCZK rate is more or less unchanged from the last meeting and is only marginally weaker than it was before the February meeting.
According to CNB logic last year, if CZK failed appreciate and thus help tighten monetary conditions, the central bank should step in and hike rates, potentially at the March meeting. However, there is still a lot of uncertainty. The Brexit process has turned into uncontrolled chaos and the threat of a no-deal Brexit looks stronger than ever. The recession in German industry continues and cast doubt on the notion that the problems are only temporary. The CNB board members will probably prefer to take the risk of remaining slightly behind the curve than hiking into a recession. Moreover, there is also some anti-inflationary news from the Czech economy. Wage growth fell notably behind expectations in 4Q18. We expect it to reaccelerate, but the current reading adds to the overall uncertainty.
The tug of war between domestic conditions and the external environment is also reflected in the CNB communication. Some board members (especially V. Benda and A. Michl) have tended to put more emphasis on the overheating labour market and current surging inflation – Benda even suggested that he sees up to three hikes this year if the koruna does not appreciate – while others (like M. Mora and O. Dedek) see no rush to hike rates when in view of the weak external environment.
We don’t expect a hike to be announced at the March meeting, but it is a close call as domestic conditions still suggest there is room for more policy tightening as indicated by the CNB forecast model. That said, we expect the overall tone of the meeting to be relatively hawkish. We should see two more hikes this year, with the first likely to come in May. Nevertheless, if the Brexit stalemate is not resolved or postponed long term, there could be further delays. Moreover, if Germany heads into a more pronounced slowdown than we currently expect, the May hike could become less certain.
Source: Komerční banka
2nd December 2019
27th February 2020