CZ: CNB decision in line with expectations

At today's meeting, the CNB maintained interest rates at a stable level, with the main rate remaining at 3.50%. The CNB did not have a new forecast available today.

In our main forecast scenario, we expect rate stability for the next few meetings and a possible cut in November this year. However, recent data from the Czech economy indicate unexpectedly heightened inflationary pressures in certain sectors. For instance, year-on-year inflation in household service prices reached 4.9% in May, 4.4% y/y in business services, construction prices rose 3.9% y/y, agricultural producer inflation hit 15.7% y/y, and we still observe a strong labor market and solid consumer demand.

Thus, overall, we now see an increasing risk that the CNB might keep rates unchanged until early next year if inflationary data persist in the coming months. We still view this as an alternative scenario, but its probability is gradually rising. The results of the autumn parliamentary elections could also influence this, especially if they imply (future) strong fiscal expansion, prompting the CNB to exercise greater caution. Global developments present bidirectional uncertainty.

Heightened uncertainty remains around the neutral rate estimate. The CNB has set it at 3% in its forecast, which likely explains the current (May) CNB forecast for next year's three-month PRIBOR at just 2.8%. However, some board members have long suggested they view the neutral rate higher, so it's possible the cycle could halt at a key rate of 3.25% or even the current 3.50%.

The press conference will start shortly. We will issue a commentary afterward.