Day of Reckoning: Anticipating a Cutting Cycle as Czech National Bank Gears Up for November Meeting

Czech National Bank Preview: Day of Reckoning

We expect the CNB to start the cutting cycle with a 25bp move at the November meeting. The central bank will also unveil a new forecast with a significant revision in the dovish direction. We see the geopolitical situation and the impact on energy prices and EUR/CZK as the main risk to our call at the moment.

 

Cutting cycle starts

The Czech National Bank will meet on Thursday next week when it will present its last forecast published this year. We go into the meeting expecting the first rate cut of 25bp to 6.75%, a view we have held since June.

On the data front, a lot has changed in the economy since the CNB's August forecast, and almost everything is pointing in a more dovish direction. GDP is expected to be revised significantly downwards, especially for the first half of the next year and not only because of domestic weakness but also the outlook for abroad. The labour market, while still tight, is showing slower wage growth than the CNB expected in August. Most importantly, inflation is below the central bank's forecast. Headline inflation for Q3 came in at 0.1pp, and core inflation at 0.3pp on average below expectations. Add to that, energy prices! They look set to fall faster than expected in the coming months and in January.

 

New forecast will convince the undecided votes

Moreover, the CNB is already behind the curve, given that the Bank's model indicates rate cuts earlier. This, combined with other deviations from the forecast, should lead to a significant revision in the path of interest rates of around 50bps on average over the forecast horizon. On the other hand, this is countered by a weaker CZK, which the CNB expects to reach current levels only in Q1 next year.

However, the board's communication seems to suggest that the weaker koruna is not a problem for now. We believe the pain threshold for delaying a rate cut would be the 25.0 EUR/CZK level, which we don't see on the table for now. Board members are basically unanimous in their statements that the November meeting is the first live one for a rate cut and we believe the new forecast will convince the undecided votes. Otherwise, we believe a rate cut will be delayed only until December, but next week's meeting should already show some votes for a rate cut. In general, we see the main risks more at the global level, especially the impact on energy prices and EUR/CZK, which is probably the CNB's main focus these days.