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Czechia Watch: CNB bets on rapid decline in inflation, cuts rates by 50bps

At Thursday's monetary policy meeting, the CNB bank board decided to cut rates by 50bps. The reason for the faster rate cut than expected by our and market forecasts is mainly due to the high degree of certainty about January inflation, which the CNB expects to head towards 3%.

The press conference after the decision was rather dovish, which is reflected in the development of the koruna, which first weakened by 0.5 % above 25.10 EUR/CZK after the decision and then weakened once more above 25.20 EUR/CZK during the press conference. In particular, the information that 6 out of 7 members voted in favour of the 50bps cut, with the remaining vote in favour of an even sharper cut of 75bps, was a dovish surprise. According to Governor Michl, inflation is already within the tolerance band (1-3%) on the outlook, and core inflation should end up within it on average for the whole of 2024 as well (2.9% according to the CNB). Despite this, the bank board still assesses the risks as rather inflationary, which prevented the decision to cut interest rates even more sharply. The Governor's comments on the exchange rate of the koruna were also interesting; although the bank board is monitoring the exchange rate, it did not play a significant role in the decision. Yet in 2022, at the levels where the Czech currency is now against the euro, the CNB actively intervened in favour of the koruna.

CNB forecast for 3M Pribor compared to RBI forecast
in %
Source: CNB, Macrobond, Raiffeisen Research/RBI

In terms of the updated forecast, the economic outlook had deteriorated further. According to the CNB, the Czech economy is expected to grow by only 0.6% this year, compared with the originally estimated 1.2%.

CNB forecast for GDP growth compared to previous and RBI forecast
in %
Source: CNB, Macrobond, Raiffeisen Research/RBI

The central bank's analytical department expects inflation to be similar to the previous forecast, averaging 2.6% this year. Interesting is the estimate on the level of interest rates, where, in addition to the still stated rapid decline, there has been a significant reduction in expected rates over the longer term. The forecast for PRIBOR 3M implies a neutral key rate close to 2.5%. It is the terminal level of rates that the Governor said will be a topic that the bank board will discuss in more detail at future meetings. However, he indicated that he was of the opinion that the neutral level should be rather higher than implied by the forecast. As far as the koruna is concerned, the CNB expects the exchange rate to be stronger, below 24.70 EUR/CZK in the baseline scenario throughout this year.

CNB forecast for inflation compared to RBI forecast
in %
Source: CNB, Macrobond, Raiffeisen Research/RBI

Today's decision shows the CNB's determination to cut rates faster and we expect rates to fall at the same or faster pace at the March meeting. Our forecast is currently under revision. If January inflation ends up close to 3%, rates will likely fall at a faster-than- standard pace at other meetings in the first half of this year as well.

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Vratislav ZAMIS

location iconCzech Republic   

Vratislav is a macroeconomic analyst at Raiffeisenbank in the Czech Republic. He has joined the team located in Prague at the beginning of 2022. Vratislav studied economic policy at the Faculty of Economics of the Prague University of Economics and Business. During that time, he worked in an investment environment as an analyst with a focus on equity markets. Apart from current economic developments in Czechia and the CEE region he is particularly interested in the real estate market and its interconnection with the overall economic development.