News

On-hold and turning to cautiously neutral bias

The CNB kept rates unchanged today. Compared to the prior dovish meetings / steps, the CNB meeting today was fairly neutral, with Governor Rusnok indicating no imminent need for further easing via cuts. Easing via unconventional measures seems highly unlikely at this point due to the lack of deflation risks. Stability in rates for the rest of year seems as most likely. What appears as a cautiously neutral CNB bias should make CZK stand out vs its CEE peers (PLN and HUF in particular). CZK IRS curve to retain the steeping trend, driven by core rates.

• The CNB kept rates unchanged today as broadly expected. Today's CNB press conference was relatively clear in terms of communication. The current macro data suggest that the domestic economy could develop further in line with the baseline scenario of the CNB's May forecast This would mean:

• the stability of interest rates in quarters ahead;

• no need to use unconventional monetary tools such as negative rates, QE or FX-floor renewal.

• However, the situation remains highly uncertain. This is the reason why the CNB does not want to exclude any possible tools and this is why the internal discussions about potential unconventional tools continue. But these measures are not likely from the current perspective and hence hypothetically there is no need to talk about them now. There is neither strong dis-inflation, nor deflation, meaning that the CNB is most likely able to maintain its inflation target with the current tools.

• This is in line with our expectations that the CNB will avoid unconventional instruments. From today's statement, it also seems more likely that interest rates have bottomed out and will now remain at current levels for some time ahead (if economic situation does not deteriorate above expectations). As such, no surprise from the CNB this time around.

FX: CZK is our preferred CEE currency given limited scope for further CNB easing (even one last rate cut to bring interest rates to the zero lower bound looks questionable now), the solid fiscal position and the low odds of the CNB leaning against CZK strength (due to the low risk of deflation – vs the clear deflation risks in 2013 ahead of the start of FX interventions). We see EUR/CZK at 26.00 by the year-end.

Domestic Bonds & Rates: We see the CNB being largely done with easing measures. Given the CNB’s strongest focus on inflation of the CEE central banks, the CNB should be the least dovish central bank in the region from now onwards (vs further likely cuts from the NBH and more QE from the NBP) and eventually be the first to start tightening. This suggests further 1s3s CZK curve steepening vs PLN. CZGBs remain the safe harbour in the CEE space. Despite the CNB being the only CEE central bank not engaging in QE and the MinFin frontloading the supply of bonds, CZGBs have done well due to their high credit quality and constructive FX outlook. CZGB yields at the belly and long-end should trade in line with the expected gradual rise in core yields.

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