September CNB interest rate decision: hawkish calm before the storm?
Commentary by Jaromír Šindel, Chief Economist of the CBA: Higher-than-expected wage growth will be the main, but not the only, reason for keeping the interest rate at 3.5% at the CNB's September meeting and for the intensification of the hawkish tone in the communication. The latter may indeed indicate a further upward movement in the interest rate, but rather in an unspecified distant horizon. A stronger koruna or tighter monetary policy through the longer end of the yield curve is unlikely to lead the CNB to a dovish mindset.
The Bank Board will thus again not follow the CNB's August forecast, which had predicted one CNB interest rate cut to 3.25% by the middle of next year. This is mainly due to stronger wage growth, unadjusted for productivity growth. Should this divergence continue in the third quarter, it could push the interest rate outlook up by around half a percentage point.
Moreover, this surprise took place against the backdrop of a positive GDP revision. Up to the time of the revision, the CNB's GDP forecast was perceived by the markets as too hawkish, and thus raising the possibility of dovish rhetoric later on. However, the monthly data for June and July should put the brakes on excessive optimism.
Although consumer inflation surprised the CNB's forecast slightly positively in August, in constellation with higher unit labour cost growth and the CNB's own forecast for core inflation (see discussion below), this cannot be seen as a sufficient disinflationary factor.
The koruna has appreciated more strongly, but so far it is on average 1% stronger against the euro than the CNB had counted on. If the CNB were to come to the strong belief that EURCZK around 24.3 could last into this year's final quarter, then the undershooting of the CNB's forecast would be around 3%. This - were it not for stronger wage growth - could have a dovish effect on the Board. Even so, the Board might quietly ignore this message in view of the upcoming October elections, which may change the fiscal trajectory.
Although the CNB's interest rate remains higher than forecast, it is also accompanied by slightly higher euro rates than the CNB itself had anticipated. For the time being, this is not reflected in the koruna (see second chart), which is therefore holding a stronger level against the euro. The monetary policies of the ECB (slightly more hawkish) and the US Fed (slightly more dovish) thus have a rather neutral impact on the CNB.
At the same time, the thesis of tighter monetary policy through the longer end of the yield curve remains valid - compared to the first half of the year. However, this is so far having a stabilising effect rather than a directly dampening effect on economic activity, for example in terms of the production of new mortgages (see August Hypomonitor).
A detail on the CNB's forecast, which, while calling for a rate cut, still envisages core inflation of around 2.2% at the monetary policy horizon, with a current annualized momentum of 2.4%: It could be argued that this is an almost negligible overshoot of the inflation target, especially if the CNB is targeting headline inflation. However, core inflation has risen by 2.5% over the past year, contributing to a similar rise in headline consumer inflation. Again, it could be argued that this is a negligible overshoot of the inflation target. However, not in the context of the long-term overshooting of the midpoint of the inflation target since 2019.
Economic development compared to the August CNB forecast:
- First column: slightly more benign inflation development vs. slightly stronger consumption.
- Second column: stronger wage growth accompanied by stronger ULC growth.
- Third column: slightly higher short-term rates and a stronger koruna.
