CNB's Shifting Focus: Rate Cuts Expected from August Meeting
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Rate cuts will be topic for CNB from August meeting
The central bank put a possible interest rate hike back on the table in March due to an overheated labour market and expansionary monetary policy. However, recent data has been rather weaker and we believe the reasons for a rate hike are gone.
Still, the CNB will want to be hawkish in June. Later, however, rapidly falling inflation could turn the narrative around very quickly. Starting with the CNB's new forecast in August, we think the board's focus will shift to cutting rates.
We believe the main indicator for the first rate cut is spot headline inflation. Should inflation confirm its direction below 8% YoY by the end of this year, we could see a rate cut as early as autumn or early winter. Otherwise, the board may wait until 1Q24. However, recent data tends to point to an earlier cut this year.
CNB rate and PRIBOR
CNB relaxes mortgage limits and reduces CCY buffer
The credit market essentially froze after monetary policy tightening translated into higher loans rates. The mortgage market has been showing high double-digit YoY declines in loan volume for a long time but, on the other hand, we have seen some signs of recovery in recent months.
At the same time, the CNB eased mortgage lending limits (DSTI) slightly in June and reduced the countercyclical capital buffer from 2.50% to 2.25%. This may prolong the recovery in the mortgage market, which we have so far considered rather temporary. However, non-performing loans remain on a downward trend despite the impact of high inflation on household disposable incomes. The banking sector's capital adequacy ratio remains at the highest levels in the region.
Interest rates and NPL
Current account returns to surplus
The current account returned to surplus this year, mainly due to the reversal in the trend of foreign trade and, of course, the improvement in the energy situation. We expect the positive trend to continue, but at the same time we may see a pick-up in demand and higher imports of goods and services in the second half of the year.
Moreover, the dividend period is yet to come which will also slow down the improvement in the current account surplus. Overall, we expect a current account surplus of 0.3% of GDP this year and a further improvement to 1.0% next year.
Current account
