The new pigeon tandem at the CNB and the still high savings rate
Economic commentary by Jaromír Šindel, Chief Economist of the CBA
The CNB's decision to keep the interest rate at 4% in December was not unanimous, as K. Kubelková and J. Procházka voted for lowering it to 3.75%. In the discussion, new board member J. Seidler highlighted four arguments of a more hawkish nature. The market is pricing the CNB's future interest rate cut a little more cautiously than analysts' December expectations. The savings rate of Czech households remained well above its pre-Covember average of 12% in the third quarter, at 18.8%. The CNB's interest rate decline is also taking a bite out of households' disposable income.
New doves at the CNB?
The CBN left interest rates at 4% in December, the first pause after a year-long cut from 7%. However, two board members, K. Kubelkova and J. Procházka, voted to cut the interest rate by 25 basis points to 3.75%. This pair is a slight surprise, but not a complete one, as the dovish setup in their case was already partially evident in November. The combination of still strong wage growth in the third quarter and persistent price increases in the core services segment above the inflation target did not change this mindset. This is not true of the rest of the board.
In the Minutes of the meeting, the last two paragraphs on house prices and the possible impact of lower euro rates on the CNB rate path are particularly noteworthy. These show that if we look at the structure of core inflation (tradable goods linked to the exchange rate; services linked to the labour market; imputed rents linked to house prices), the majority of the Board perceives rather upside risks to most of core inflation.
What is the focus of the new board member Jakub Seidler?
- Concerns about possible persistent stronger wage growth.
- The base effect will push year-on-year food price and imputed rent growth higher (this argument may suggest concerns about the impact of stronger year-on-year inflation on wage growth, as it is not itself valid at the monetary policy horizon).
- The volatility in the 2024 ECB and Fed interest rate outlook reduces the strength of the signal of current market pricing of the outlook for foreign interest rates.
- Stagflationary tendencies as a dilemma for monetary policy address the CNB's mandate, i.e. inflation targeting in particular.
Market outlook is more cautious than analysts in December
Czech forward rates imply a decline in 3M PRIBOR to 3.4% on the annual horizon, i.e. a double to triple reduction in the CNB interest rate by a quarter of a percentage point. The market now appears somewhat more cautious, probably due to the December pause in the CNB's rate cut cycle, than suggested by the December Reuters survey of analysts or the November CBA forecast. The latter had expected the CNB interest rate to fall to 3.25% by the end of this year.
The current Czech market pricing is between the expected 1 percentage point drop in the ECB deposit rate (now at 3%) and the US Fed funds rate (4.25%-4.5%) of around 0.4 percentage points. Thus, the next CNB interest rate cut could occur in the first quarter, and the CNB will not have much new data until its next meeting (6 February) (December inflation on 13 January; a new flash estimate of January inflation on the morning of 6 February; November economic activity on 7, 9 and 10 January; and a preliminary estimate of economic growth in the fourth quarter of the previous year on 31 January).
Thus, a February CNB rate cut would probably only be possible with a more pronounced slowdown in core inflation growth including the services segment (which the CNB will not see in the January inflation flash estimate due to its less detailed decomposition) or due to any dovish surprises from the Fed or ECB meetings (January 29 and 30). Thus, the koruna will continue to be under double pressure due to concerns about export performance vs. the more positive impact of the interest rate differential.
Czech household savings rate remains high
Revised national accounts data pointed to slightly stronger economic growth in the third quarter of 0.5% q-o-q and 1.4% y-o-y, a cosmetic change that does not change the economy's outlook for growth of around 2% this year after around 1% growth in the previous year. Besides, the data showed only a slight decline in the household savings rate in the third quarter to 18.8% from 18.9% in the previous quarter. Although real household income rose by 1.3% in the third quarter, growth in real disposable income was slower at 0.8%. This reflects, among other things, stagnant profits and mixed household income (in real terms) and a decline in (not only) interest income on assets (see chart below).
