The Czech National Bank Challenges Dovish Market Expectations Amidst Inflation Risks

The Czech National Bank fights dovish market expectations

The vote split indicates that inflation risks have diminished, but the governor continues to favour hawkish messages. Disinflation in the summer months will be a problem for the central bank in combatting the market's dovish expectations. Later, however, disinflation is set to slow significantly, which may lead to a delay in rate cuts.

 

Vote split more dovish, hawkish threats remain

The CNB board left rates unchanged yesterday, in line with expectations. The vote split moved from 4:3 to 5:2 in favour of stable rates. Two members voted for a 25bp rate hike. We suspect that newcomer Jan Prochazka may have joined the majority this time - names will be confirmed on Friday, in next week's Minutes. From this perspective, it would appear that the hawkish story is over.

 

During the press conference the governor indicated that he intends to continue the hawkish stance. He reiterated that the CNB is ready to intervene in the FX market if needed and that rates are high enough. He also highlighted that, despite weaker-than-expected economic numbers, including inflation, upside risks to inflation remain. Thus, if wage growth, household consumption, inflation or fiscal policy surprises to the upside, he said the entire board is prepared to hike rates in the coming months. Putting threats of rate hikes aside, the main message we think the CNB is trying to send is that rates will remain stable for longer than the market and CNB currently forecast.