The CNB's new outlook for higher rates "only" translated into hawkish communication
The CNB Bank Board unanimously left interest rates unchanged at 3.5% in the face of uncertainty over the Iranian conflict, although its new forecast suggests an increase to 4% this quarter. The decision is likely to have been driven by a combination of lower economic growth at the start of the year, which may have increased the weight of an alternative scenario with slower growth and lower rates. But probably also the fact that the baseline scenario with higher rates is only assumed for two quarters. It is therefore not surprising that the Board would want to have this monetary policy move sanctified by future developments. However, the latter may surprise with an inflationary development, of which a part of the Board is aware.
Governor Michl mentioned an alternative scenario with lower growth and interest rates as an answer to the question of why the CNB had not followed the new forecast, which brought the CNB interest rate closer to 4% by the second quarter of this year, while the previous forecast had worked with this level for 2027 because of stronger economic growth. Slower economic growth (see reports here and here and the second chart below) likely increased the weight of this alternative scenario.
At the same time, the new forecast looks out for a 4% interest rate "only" for two quarters. And it predicts a drop in the interest rate to 3.75% in the final quarter of this year and then to the current level of 3.5% at the end of the first quarter of next year. This seems to me to be too short-term a change in monetary policy settings in the current volatile world. And this is probably not only truefor this Board, but historically the Board has only proceeded to make similar short-term changes in monetary policy when developments are confirmed at the next meeting.
But the future risks are upside risks even with the end of the Hormuzblockade . Governor Michl mentioned that part of the Board is keeping the door open for a rate hike if there is a further pick-up in core inflation (see April inflation risks here) and/or higher energy prices seep through to the rest of the economy. The question on fiscal policy also came up. While the Governor did not mention lending to the government as an upside risk during the presentation, he did not omit looser fiscal policy and lending to the government and households as one of the upside risks in an economy with still strong wage growth (in services).
The CNB's new forecast is still looking for solid economic growth with a relatively modest acceleration in consumer inflation. In my outlook for today's decision, I had factored in a downgrade of the CNB's GDP growth outlook to 2.5% for this year and next, and similarly for the average inflation outlook. However, the CNB came up with a slightly more optimistic forecast with average GDP growth of around 2.6% with 2.3% average consumer price growth. This more moderate inflation growth reflects Brent crude oil at $85 this year and $76 next year, which therefore seems to anticipate an early end to the conflict.
The CNB will release details of the new forecast on Monday 11 May with the minutes of the meeting and the full Monetary Policy Report on Friday 15 May, which should allow the more hawkish part of the Bank Board to be partially identified (so for now we can only guess: Kubicek, Zamrazilová, Seidler).
The CNB's new forecast and its comparison with the original
Slower economic growth surprised the CNB
The CNB's new forecast and its comparison with the original
Compared to the previous forecast, the CNB expects slightly tighter monetary conditions at the annual outlook, offset by easier conditions next year
Inflation risks were also priced into market interest rates with longer maturities
EURCZK is close to the levels from the model with financial variables
