Czech National Bank Initiates Cutting Cycle with 25bp Move amid Economic Concerns

CZK: CNB to start its cutting cycle

We expect the Czech National Bank (CNB) to start the cutting cycle today with its first 25bp move. This seems fully in line with market pricing and economist consensus. However, surveys suggest it is a close call. And of course, upward pressure on commodity prices and tensions in the Middle East may be reasons to wait a little longer for the CNB. But we believe the new forecast plus weak economic data this week will be sufficient reasons to cut rates today. In addition to the decision itself, we will also see new numbers that should be revised towards a worse economic outlook, lower inflation, a weaker CZK and a faster pace of rate cuts.

However, for the markets, today's cut has become a done deal and the collapse in PRIBOR in recent weeks indicates that more than 25bp is priced in for today's meeting. At the same time, the entire curve has shifted lower, making essentially the entire cutting cycle already priced in 1y horizon. We see a significant deterioration in the risk/reward of being received in rates at current levels versus a scenario of no rate cut today. In the FX market, we see the situation getting a lot easier. In the event of a rate cut being delivered, we expect EUR/CZK higher in the 24.80-25.00 range supported by a new CNB forecast indicating levels above 25.00 and still room to price in further rate cuts in the longer term, which would lead to a deterioration in the interest rate differential. Otherwise, we think the potential for CZK appreciation is limited and EUR/CZK may touch 24.50 only temporarily.