CNB likely to let caution prevail in March meeting and keep policy rate steady at 1.75 pct, says Oxford Economics

The Czech National Bank (CNB) is expected to  let caution prevail in its March 28 meeting and keep the policy rate steady at 1.75 percent, as it did in the last two meetings, according to the latest research report from Oxford Economics.

It can take several quarters until higher interest rates feed through to the real economy, and the deceleration of wages in Q4 may be testament to the five rate hikes last year beginning to take effect.

Nominal wage growth slowed to 6.9 percent y/y (from about 8.5 percent in the previous quarters) and this trend is expected to continue this year, as firms’ profitability has already taken quite a hit from past wage growth.

February headline inflation rose to 2.7 percent from 2.5 percent in January, which is above the 2 percent target but still within the ± 1pp tolerance band. The main contributor to the rise were again housing prices (contributing about 1.4pp), while prices for food and alcoholic beverages contributed 0.3pp each.

However, the arguments in favour of waiting with further hikes shall prevail -- First, wages disappointed at the end of last year, with nominal wage growth having fallen 1.6pp to 6.9 percent y/y in Q4, the report added.

Second, the global economic outlook remains uncertain and the Czech economy is particularly exposed to the risk of a no-deal Brexit. Finally, the dovish shift by the ECB should discourage the CNB from rushing ahead, and instead stay put until May.

"Negative signals for world trade have not been resolved over the last few weeks, and we expect the CNB to wait until the clouds over the Czech export growth horizon have cleared," Oxford Economics further commented in the report.