Czech central bank may end this year with another hike – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that the Czech National Bank may end this year by raising its main interest rates further.

Key Quotes

“It is a close call, but after the Czech koruna lost its bullish momentum and weakend 0.7% against the euro since the beginning of December, we expect a 25bps hike to 0.75% to be announced at 12:00GMT. Even if the CNB refrains from tightening monetary policy further, policy makers are likely to indicate that it is reasonable to expect more hikes next year due to robust economic activity driven by consumer spending, which fuels demand-led inflationary pressure.”

“After falling to a year-to-date low at 25.387 on November 24, EUR/CZK bounced back and traded earlier this week as high as 25.732. Admittedly, it is not a substantial rebound given that EUR/CZK plunged from around 27.00 level since March, but it may prove sufficient to convince other members of the Council to join Hampl who is likely to advocate a 25bps hike. Governor Rusnok may make the case to keep rates unchanged until February when the new macroeconomic forecasts will be available to assess the outlook for the Czech economy.” 

“Meanwhile, the pace of GDP growth accelerated sharply to 5% y/y in Q3 from already robust 4.7% y/y in Q2. While private consumption is a major engine of strong growth, the economy is also driven by exports – fuelled by demand from the EU where economic activity is healthy - and investment. Inflation decelerated from 2.9% y/y in October to 2.6% y/y in November, but it is still on track to end this year above the CNB’s official 2% target. With consumer prices likely to stay in the upper boundary of the 1-3% range for most of 2018, the central bank will remain in tightening mode.” 

“Throughout next year the pace of tightening will be dictated by the CZK. If the currency firms faster than the CNB currently assumes, rate setters may opt for more gradual rate hikes to maintain the competitiveness of Czech exporters by preventing an excessive appreciation of the koruna.”

“In terms of market reaction to today’s meeting, a 25bps hike may dent the short-term bullish bias in EUR/CZK and prevent a break above the key resistance area at 25.787/756. Keeping rates unchanged, especially if such a decision is accompanied by relatively modest hawkish statement, could bring into focus the 26 level.” 

“Looking from a wider perspective, the price action in EUR/CZK since March - when the CNB stopped intervening - fits into the 5 waves sequence according to the Elliott Wave principle. EUR/CZK is currently in a corrective phase. Once this phase runs its course (raising rates today would be a bearish signal), EUR/CZK should start trending lower again with 25.00 as our next year’s target.”