CNB Review: Stable Rates Amid An Overly Optimistic Growth Outlook

The policy rate was kept unchanged by unanimous vote, which we believe is the right response given the considerable uncertainty, particularly around economic activity. The CNB’s growth forecast appears too optimistic. The governor reads the rates outlook as broadly stable while inflation risks remain. Yet the overall tone was surprisingly dovish

Time to do nothing and evaluate, with a dovish tilt

The Czech National Bank has unanimously decided to leave the policy rate unchanged at 3.75% at its August meeting. We see that as the right thing to do, as the Czech economy faces the aftermath of the protracted conflict in the Middle East as well as more intense fighting in Ukraine, along with some new emerging risks. Governor Ales Michl made clear at the presser that the overall risks are still assessed as pro-inflationary, especially when looking at core inflation and stubborn price growth in the service sector. The labour market is still assessed as tight by the Bank Board with wage dynamics deemed as a potential source of trouble for price stability.

CNB growth outlook seems overly optimistic

Source: CNB, ING, Macrobond

Otherwise, the press conference made a surprisingly dovish impression, in contrast to our expectations that the unanimous no-change decision would be served with a hawkish side dish. The governor mentioned so many risks related to potentially weaker economic performance that one could almost get the impression that an excuse for the preceding tightening cycle would follow. Perhaps this was intended to offset the very optimistic GDP growth outlook, especially given mounting uncertainties and the rather disappointing second-quarter GDP reading. Indeed, the CNB staff forecast, which did not yet incorporate the latest GDP data, projects growth of 2.2% this year and 2.7% next year, both well above our forecasts. We do not consider such outcomes impossible, but we see our own forecast as being closer to the upper end of the plausible range.

Inflation behaves; rates seen as broadly stable

The CNB inflation forecast is basically in line with ING's; only 0.1ppt softer on average over the next year. Interest rates as represented by 3M PRIBOR are broadly flat, excluding a marginal upward shift in 4Q26 that is reversed in 2Q27. The CNB model likely reacts to increasing inflation at the turn of the year, although this is largely driven by base effects. In any case, the governor interpreted the rate path as broadly stable. And here is my question: what happens to the CNB's inflation projection if the economic expansion, and possibly consumer spending, turn out to be softer than the CNB expects, say even below our own projections?

Inflation well-behaved except for 1Q27 base effect

Source: CNB, ING, Macrobond

You guessed it: the inflation path would soften, and the interest rate path along with it. So, it may be the case that if the downside risks to growth mentioned above were to materialise, the words of Jan Frait and Jan Procházka regarding a possible reversal of the June hike – should monetary policy prove too restrictive – could come back into play. We do not see this as the most likely outcome at this stage, but we want readers to be aware that this sequence of events cannot be ruled out. Consider the evergreen feature of the CNB's medium-term forecast: a weakening koruna against the euro, an assumption that has proven systematically biased. Add that to the mix, and imported inflation could turn out even softer than implicitly assumed.

Sometimes, doing nothing is the right thing

Summa summarum, there are relevant reasons for the governor's dovish tone at the presser, especially against the backdrop of the CNB's own forecast. This grants the overall impression of – how to put it – more balance. For sure, the future is always uncertain (as is the past), but this was precisely why Karina Kubelkova did the right thing at the June meeting and voted for an unchanged base rate. She set aside political and personal considerations, which allowed her to remain consistent during the August vote. It is only fitting that she will join tomorrow's meeting with analysts. And yes, like her, we believe that stable rates are the right answer to uncertain times.

The CNB and ING see broad rates stability

Source: CNB, ING, Macrobond

Our market view

Today’s CNB meeting delivered a dovish surprise for markets, with the new forecast pointing to unchanged rates and Governor Michl reinforcing that message. Although we had expected a dovish tone, the magnitude of the surprise recalled the earlier end of the debate on possible rate hikes. After the meeting, markets priced out roughly half a hike, leaving expectations at around 1.5 hikes. This remains well above our unchanged-rate forecast and still makes Czech rates the second-most hawkish market in EMEA after South Africa. Given the dovish press conference, we expect markets to continue reducing tightening expectations. The global backdrop remains important, but we see pricing stabilising around one hike as protection against higher oil prices. In our view, the curve still has room to move lower, with a bias towards steepening.

EUR/CZK rose 0.2% to 24.235, but the moves in rates and the interest rate differential point to levels closer to the 24.250–24.300 range, which we see as the likely landing zone. Tomorrow’s CNB meeting with analysts should generate more headlines. If the dovish tone is confirmed, the koruna is likely to face further weakening pressure.