Wait-and-see stance continues

The CNB board kept interest rates unchanged today by unanimous decision. The two-week repo rate stays at 0.25%, the discount rate at 0.05% and the Lombard rate at 1%.

Economic developments more or less as expected in last CNB forecast in August. Governor Jiri Rusnok highlighted this after the meeting, so no analyst expected any policy move before the meeting. Rusnok said that he does not expect another complete lockdown, but he stressed that a second pandemic wave is a big risk. The CNB board sees substantial risks to its forecasts amid increasing economic uncertainty as the virus worsens again.

Current koruna as natural stabiliser

CZK was slightly stronger in 3Q than forecast by CNB. When asked about recent CZK depreciation, Rusnok pointed out that the CZK has been reacting to news about rising virus cases. He repeated that a weakening CZK is a natural economic stabiliser that decreases the need for the use of unconventional easing measures. Interestingly, the governor repeated that the CNB reserves the right to act in the event of more pronounced CZK depreciation. However, he stated that he sees this as a hypothetical scenario. On inflation, the governor pointed out that it is robust, especially core inflation, which has been above forecast. Meanwhile, food prices and the impact of higher excise taxes have been lower than expected. The governor repeated that the CNB expects inflation to decelerate back to target later next year.

Interest rates likely to remain low until 2022

We stick to our expectation that the CNB will leave key interest rates unchanged until 1Q22. However, since the risks to economic growth remain elevated, we cannot exclude the need for additional monetary policy easing. We don't know exactly how the CNB would do that, but we think CZK devaluation would be the most likely tool.

At the beginning of September, the financial market was pricing in 50bp of rate hikes in two years, but it has now priced out most of that expectation. The CZK slightly appreciated during the press conference and interest rate swaps slightly increased, but we think that was more of a correction of recent moves than the CNB providing any impulse.