CNB Preview: Rate hike looming for Czech central bank - ING

Analysts at ING believe the 3Q17 hike by CNB is a done deal as they see no relevant reason to postpone interest rate normalisation.

Key Quotes

“Wages are accelerating, core inflation is high, house prices are soaring and the ECB has signalled policy normalisation. Importantly, the CNB should take comfort from the recent limited pace of CZK gains despite the sharp re-pricing of the market interest rate outlook. As such, a 20bp hike this Thursday seems as a very likely scenario.”

“Stronger 1Q17 GDP and solid 2Q17 data should lead to a 2017 GDP growth revision in the CNB forecasts. With wage dynamics accelerating beyond CNB forecasts and signals of strong momentum ahead, another upward revision to wage dynamics is also likely.”

“While headline inflation was slightly lower in recent months compared with the CNB forecast, it was largely due to traditionally volatile items. Importantly, core CPI is at 2.5%. Prices of services accelerated to 3.1% YoY.”

“The CNB should take full comfort from the recent limited pace of CZK gains despite a sharp re-pricing of the market interest rate outlook. This suggests that an orderly tightening cycle is unlikely to lead to sharp CZK gains. We don’t rule out another as in 4Q17 if CZK price action is orderly. We look for a total of 4 hikes over the next 2 years.”

“We expect the new CNB interest rate forecast to be at least unchanged (pencilling an overall four hikes by end-2018, including the one expected in August), with risks skewed to even more hikes indicated in the new CNB forecast, reflecting the strong fundamentals.”

“It is likely to be stressed that the interest rate forecast is conditional on (a) orderly CZK strength and (b) the macro situation. Yet, scope for a dovish downplaying is limited.”