News

With eyes on the (tightening) price

The CNB is expected to stay on hold next week, but the new forecast should provide a more optimistic 2021 growth outlook and stick to assumptions of 2H21 tightening. We expect the 2021 forecast to signal (a) 2-3 hikes; and (b) modestly lower EUR/CZK. CZK should benefit from the likely modestly hawkish CNB bias. We like 10y CZK IRS payer, targeting 1.55%.

• Despite the slower pace of vaccination and new coronavirus mutations (both delaying the timing of a potential recovery), the outlook for 2021 Czech GDP growth should be still revised higher than the November CNB forecast. The CNB might revise GDP closer to 3% for 2021 (vs. 1.7 % previously). This should be driven by the fact that 3Q GDP accelerated by 6.9% QoQ (higher than the CNB forecast), while 4Q20 also seems to be better compared to the CNB forecast (-8.8% YoY).

• The recent tax-package approval (increasing the 2021 deficit by CZK100 bn) will boost household consumption, in turn providing some pro-growth and pro-inflation dynamics. This was not yet taken into account in the November forecast, but was captured in the alternative fiscal scenario - which pencilled in 0.7ppt higher 3M Pribor in 4Q21 compared to baseline (2-3 hikes).Yet, EUR/CZK reached 26.15 in Jan, more than 3% stronger than the CNB 1Q21 assumption, and is equivalent to 3 hikes. Hence, a stronger CZK should be offset by the fiscal impulse.

• The vaccine-related more optimistic outlook for the 2H21 recovery, fiscal easing, but also stronger CZK should translate into CNB signalling 2-3 hikes in 2H21. CPI might temporarily fell below 2% in the coming months due to the high base from the last year. But as mentioned by Vice Gov Mora, a temporary decline in CPI won’t prevent CNB from hiking if the Covid situation allows. Still, and in line with recent CNB board member comments, the May CNB forecast will be of higher importance in terms of the strength of conviction about the signalled tightening - the board wants to first see the green shoots of any post Covid recovery

• All in all, we believe the CNB will overlook weaker CPI in 1H21 as 2020 inflation (at 3.2%) was the highest of the last 8 years. Once the post-Covid recovery begins (at the end of 2Q, in our view), this will enable the CNB to tighten monetary policy. We expect 50bp worth of hikes to be delivered in 2H21, most likely during the November and December meetings, but we can also envisage one 50bp hike.

FX: We are bullish on CZK and forecast EUR/CZK 25.50 this year with strong downside risks to 25.00. The koruna should benefit from the most hawkish central bank in the region and outperform all PLN, HUF and RON. With the CNB set to keep banks’ dividend payouts partly limited in 2021, this should keep the current account is surplus (as was the case in 2020) and benefit CZK. The expected cautious confirmation from the CNB that it expects to start the tightening cycle in 2H21 should benefit CZK next Thursday. Given our positive view on EUR/USD, CZK gains vs USD should be even more pronounced this year

Domestic Bonds & Rates: With the CNB set to signal rate hikes for 2H21 (conditional on a post Covid recovery), the case for CZK payers is strong. We pay 10y CZK IRS (see EM FX & Rates Trader) which we expect to benefit from the mix of a hawkish CNB and the eventual re-start of the global reflation theme. In contrast to 2y CZK IRS payers, the carry and roll on 10y IRS is meaningfully less negative (-3bp vs -9bp over 3 months). With CNB set to start tightening this year and the NBP keeping policy accommodative (despite rising CPI), 5s10s PLN-CZK spread should rise further towards 50bp this year.