CNB's hawkish press conference failed to overwhelm the hawkish environment of the global economy

2. 8. 2024
5 min. reading
Economic commentary by Jakub Seidler, Chief Economist of the CBA
CNB's hawkish press conference failed to overwhelm the hawkish environment of the global economy ilustrační foto
The press conference after the monetary meeting was held in a hawkish spirit, especially in view of the new macroeconomic forecast, which sees the 3M Pribor rate at the end of 2025 half a percentage point higher than the previous forecast, at 3.5%. Other changes in the forecast in terms of GDP or inflation were only partial. All 7 Board members voted in favour of a more modest rate cut. Governor Michl reiterated that the rate cut process could be stopped at any time. The Board saw the risks to the forecast as balanced, with the upside risks being higher wage demands or persistent growth in services, while the more significant downside risk was a deterioration in economic developments abroad, including in Germany. The market currently continues to expect the CNB's main rate at 3.75% at the end of this year and around 3% next year, as the overall hawkish tone of the press conference was overwhelmed in the market by weaker data from abroad and market bets on faster rate cuts by the major central banks. 

The press conference featured the following: 
  1. The Bank Board continues to see some inflationary pressures in the economy. Therefore, the Board also considers it necessary to persist with a tight monetary policy and to consider further rate cuts carefully or approach them very cautiously. 
  2. The Monetary Section's forecast expects inflation to hover around 2% in the coming months and to rise temporarily at the end of the year due to the base effect from last year. It will thus average 2.2% this year and 2% next year. Core inflation will remain elevated. It will reach 2.5% on average this year,
  3. the changes in the new forecast were relatively modest, with domestic economic growth for this year slightly reduced from 1.4% to 1.2%, and expected to accelerate to 2.8% next year. Inflation for this year has been revised down a tenth from 2.3% to 2.2% (Table 1), and will be at or slightly below target next year. The central bank sees July inflation at 2%, and it should fall to 1.8% in August. 
  4. The governor described today's rate cut as "hawkish". He mentioned that he wouldn't mind a slight undershooting of the inflation target, and even described it as mildly welcome.

What follows: The market impact of today's CNB decision was largely offset by weaker data from abroad, which signaled weakening activity, raising market bets for faster rate cuts by major central banks. Thus, foreign developments may influence the current interest rate environment in the Czech Republic towards lower rates despite yesterday's hawkish message from central bankers. However, given inflation and weaker economic data, the CNB is likely to continue cutting rates, and current market expectations of a headline rate of 3.75% at year-end appear realistic (Chart 2). For next year, the market sees rates near the 3% threshold despite 3M Pribor's new forecast above 3.5% for the full year. The current dovish global environment could not be "pushed over" by today's CNB forecast, and so the decline in long domestic rates continues after yesterday's CNB meeting (Chart 3), which could open up room for mortgage rates to fall again after the summer.