Czech National Bank (CNB) meeting on May 3 did not bring much news, with the bank board keeping rates on hold. The expected rate path was kept almost unaltered, and the CNB still sees a hike in the last quarter of this year. One member of the board voted for a hike, which was the biggest surprise of the meeting. The outcome of the meeting corroborated our view that the CNB will hike once more this year. For next year, we are much more cautious on the rate path than the central bank.
The CNB board left rates unchanged at today’s meeting, keeping the repo rate at 0.75%. The decision was backed by six of the seven board members present. One member voted for a 0.25bp hike, maintaining that the Czech economy’s cyclical position requires tighter monetary policy. The economic forecast was left largely unchanged, but the central bank did improve its view of GDP growth for this and next year, and it is now very similar to our in-house forecast. The inflation outlook was lowered, reflecting the current weak readings. The FX forecast was altered, bringing it closer to actual EUR/CZK levels. Nevertheless, a rapid appreciation remains part of the outlook, though it was shifted back from 2Q to 3Q. Next year, the currency is seen halting its gains. The CNB’s expected rate path corresponds to this FX development, as it assumes only one rate hike in 2018, towards the very end of the year. That said, monetary conditions will tighten this year as a result of FX moves, according to the CNB, with next year’s steep hiking trajectory corresponding to a stagnating koruna.
Reduced need to tighten monetary conditions next year
While our forecast is in line with the CNB’s outlook for this year, there are large differences for 2019. In our view, the CZK is set to continue strengthening in the first quarter of the year, a move that will be supported by CNB rate hikes. In the second half of the year, an economic slowdown will curb growth in the Czech Republic, which will result in a pause in the hiking cycle. However, even if the global slowdown does not occur, the CNB will probably pursue a flatter rate trajectory (it expects four or five hikes in 2019) than it expects now. The key is the ECB’s behaviour, which is set to be cautious next year. Our baseline scenario assumes two hikes in the first half of 2019. If the economy runs above potential in 2019, we can see one or two hikes more than envisioned in our baseline scenario.