Research Briefing | Nov 3, 2022

The Czech National Bank keeps rate on hold as the economy contracts

The CNB again left the policy rate unchanged at 7% at the November meeting, staying put for the third consecutive time and matching our and consensus expectations. The policy decision comes only two days after the flash GDP estimate in Q3 showing the economy contracting 0.4% q/q.

What you will learn:

  • This underscores the difficult situation the CNB finds itself in. Headline inflation picked up again in September after a brief respite, but demand pressures have all but disappeared in the economy. The labour market is also deteriorating, with unemployment rate rising for a third time in a row to 3.6% in September, a cumulative 0.4pp increase in just three months.
  • The CNB’s latest projections suggest further rate hikes to 8%. However, given the prevailing dovish voting bloc on the board, we expect rates remaining flat in the coming months with the CNB inclined to start rate cuts in March. We expect the recession to last for another two quarters with a 1.3% peak-to-trough fall in GDP. By March, inflation should also be on a downward path.
  • Despite the CNB not hiking rates further, the exchange rate is performing well. Even before the policy meeting, it had dropped to 24.5/€, lessening the need for the CNB’s FX interventions. The CZK has appreciated further since the rate announcement.
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