The Czech National Bank is unlikely to make any changes in its guidance in its upcoming meeting today and is expected to keep its policy unchanged. The central bank has already received two early Christmas gifts. Firstly, the pace of inflation accelerated surprisingly strongly and seems to be moving unerringly towards the central bank’s target. Secondly, following the Trump U.S. election win, there has been a retreat from the emerging markets that also included position closing in the nation that is easing pressure on the CZK, noted Societe Generale.
“Therefore, we do not see any reason to change our CNB call. We still believe that the floor will be scrapped in 2Q17. The upcoming CNB meeting will not bring any change of guidance”, stated Societe Generale.
The pace of inflation was anticipated to surprise the CNB on the upside; however, the sharp rise in consumer prices exceeded even the bullish forecast. The deviation from the central bank forecast rose to 0.5 percentage points in November and it is expected to broaden further in December, according to Societe Generale.
The current data corroborate with the view that inflation would reach the 2 percent level in the first months of 2017 and a considerable risk of the December reading already being higher than 2 percent. Furthermore, real wage growth accelerated to 4 percent year-on-year creating even more pressure on prices. Hence, the evaluation of risks would be clearly pro-inflationary.
“The bank board expects that FX commitment to end in mid-2017. As we see the inflation rate moving above target in the early months of the year, we still believe CNB will scrap the floor as early as in 2Q17”, noted Societe Generale.
The central bank’s comments about the negative rates would be closely monitored. Certain board members have mentioned negative rates as a tool that might be used to smooth the exit process. The central bank might introduce selective negative rates when the speculative flow intensifies in the initial months of 2017. In the upcoming meeting the negative rates discussion is not expected to get quite heated as there has been no major upward currency pressure since the U.S. presidential election results, added Societe Generale.
“Our forecast suggests that CNB will be in no hurry to hike rates, not for a while anyway”, said Societe Generale.
