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CNB raises rates, but forecasts stronger koruna, fewer hikes

The Czech National Bank (CNB) today increased the repo rate to 0.75%. The decision was unanimous (all five present members voted for a hike). The press conference was more interesting than the decision. Governor Rusnok presented a new forecast, which included the regulator’s projected EUR/CZK trajectory. It shows the CZK strengthening to EUR/CZK 24.6 by year-end. However, the forecast shows limited growth in rates for the remainder of the year. Komercni banka expects slower CZK appreciation and a stronger economy to allow central bankers to normalise rates at a swifter tempo. Komercni banka assumes three more hikes this year, with the repo rate at 1.5% at year-end.        

The bank board decided unanimously (five votes, with members Dedek and Hampl absent) to increase the repo rate by 25bp to 0.5% and the Lombard rate by 50bp to 1.5%. The deposit rate remained unchanged at 0.05%. The hike was generally expected and it was already priced in. However, Governor Rusnok presented some news in the follow-up press conference. The CNB forecasts GDP growth of 3.6% this year. That makes it bit more pessimistic than our in-house forecast of 3.8%. On the other hand, the CNB projection sees higher inflation throughout the year, but it notably eases on the forecast horizon as the inflationary pressure stemming from the labour market dissipates. We do not expect wage pressure to fade quickly. This is still a significant pro-inflationary factor, in our view, so we do not expect price growth to decelerate considerably, Komercni banka says.

Policy normalisation to continue

The current CNB staff outlook assumes only a 6bp increase in the 3m PRIBOR rate in 2Q18. However, Governor Rusnok talked about one more implied hike at the press conference. Also, other central bankers (Nidetzky, Benda and Hampl) said that the CNB will hike at least twice this year. After a long break, the CNB resumed publication of its FX forecast. The sharp expected CZK appreciation in 2Q18 surprised us: the CNB expects EUR/CZK to average 24.9. At year-end, it sees EUR/CZK at 24.6, which is close to our forecast. The CZK will encounter psychological resistance at EUR/CZK 25 in 1H18. Moreover, spring and summer dividend outflows might temporarily cause the currency to weaken. We think that would be offset by a rate hike in 2Q. In 2H, we expect stronger inflationary pressures stemming from faster economic and wage growth. The CNB will thus have enough reason to hike further. We expect the bank board to raise rates 25bp in each quarter, the repo rate hitting 1.5% at end-2018.