Czech Republic: A close call but CNB likely to wait until November - ING

Given the lack of CZK strength and the sound domestic economic data, Jakub Seidler, Chief Economist at ING suggests that they believe that a 25bp hike either this week or in November meeting is a done deal.

Key Quotes

“We see a 60% probability of a hike in a November vs 40% of a hike on Wednesday. This is not necessarily for fundamental reasons, but rather due to the publication of the CNB Inflation Report and the new set of forecasts in the November meeting.”

“Czech CPI inflation hit the 2.5% level in July and should remain safely in the upper tolerance band of the CNB over the monetary policy horizon. Moreover, the CZK postinterventions over-boughtness limiting koruna appreciation as well as the favourable economic growth generates clear pro-inflationary risk.”

“Economic performance soared in 2Q17 as GDP reached 4.7% YoY, a figure well above the initial market estimate of 2.9% or the CNB forecast of 3.6%. Stronger dynamics were driven by renewed investment activity, but also accelerating consumption of households (4.4% YoY vs 3.5% in the CNB’s forecast) and foreign demand.”

“Wage dynamics are picking up. The average real wage growth reached 5.3% in 2Q17 beating expectations of the market and the CNB. All in all, the economy story remains favourable, which demands tighter monetary conditions. As such, the CNB will deliver another hike this year.”

“Yet, the CNB may not see a need for an imminent hike this Wednesday. This was confirmed by Governor Rusnok, pointing at his preference to see another CNB staff forecast before the next rate decision. The favourable 2Q GDP is partially an “optical effect” driven by working day adjustment (65 in 2Q16 vs 61 in 2Q17). Real not-seasonally adjusted GDP growth in 2Q17 reached 3.4% YoY, vs 4.7% adjusted. Also, the July credit statistics confirmed a deceleration in new housing loans, which reached the lowest level since January 2016. This fall went beyond the typical holiday seasonality and might be related to new CNB macro-prudential measures. We thus believe that the CNB will wait until November (but will pre-signal the hike this week), albeit this is close call.”