CEE: CNB Strives to Counter Dovish Market Expectations

CEE: CNB will try to fight dovish market pricing

Industrial production, PPI and labour market data in Poland will be published today. We expect industrial production to have fallen by 2.0% yoy in May, less than the market expected. Industrial producer prices have slowed again from 6.8% to 4.7% YoY in our view, and we also pay attention to wage growth, which we see rising 13.0% YoY. 

Later today we will see the decision of the Czech National Bank on rates and we expect these to remain unchanged. Reasons for hiking rates mentioned by the board have diminished in recent weeks and the main focus will be on the vote split. In May, three of the seven members voted for a hike. We expect some votes for a hike to remain for hawkish central bank communication. We expect a 5:2 vote split in the baseline scenario, however central bankers voting for a hike in May have not been very vocal of late and so it is hard to assess how they see weaker inflation or wage growth. Overall, the vote split will thus be the main question for Wednesday's meeting, which will determine the outcome. The governor will still be pushing a hawkish message of higher rates for longer, and premature pricing of rate cuts by the market. We see the first rate cut at the end of the year. 

The Czech koruna has been weaker than expected in recent weeks. We still expect the koruna to return to stronger levels. On a global level, the koruna should benefit most in a rebound in EUR/USD, while the CNB will try to postpone dovish market pricing, which should support interest rate differentials. Market positioning is rather light comparted to PLN and HUF. We expect the koruna to return below EUR/CZK 23.70.