CZ: CNB decision in line with expectations

In a move that aligns with our predictions and market consensus, the Czech National Bank (CNB) has today implemented a standard rate cut of 25 basis points. This brings the principal rate down to 4.50%. This marks a continuation of the CNB's strategy of incremental rate reductions. However, it's noteworthy that this is the first instance this year where the rate cut has been by the standard 25 points.

The standard range rate cut likely stems from two key factors. Firstly, the narrowing gap between anticipated inflation and interest rates, which diminishes the need for further substantial monetary easing. Secondly, inflationary pressures persist, despite a surprisingly low inflation rate in June. These pressures are particularly evident within certain sectors of the Czech economy, notably services. Additionally, wage growth is projected to maintain a relatively high trajectory, and the koruna's exchange rate is also contributing to inflation. Given these factors, we anticipate a more cautious approach from the CNB in the forthcoming months.

Ahead of today's meeting, the koruna weakened to an EUR/CZK level of 24.50. This was driven by expectations of a smaller part of market that the CNB might implement an additional 50-point rate cut, which ultimately did not occur. The koruna has since made a partial recovery. The second factor is the recent economic data, which has underperformed expectations, suggesting the CNB might deliver a higher extent of monetary policy easing in the remainder of this year. In fact, market sentiment is shifting towards the possibility of the CNB reducing its main rate to 3.75% by year-end, a departure from the previous expectation of 4%.

The press conference starts in 3.45pm. We will release an update after it.