CNB only discussed but did not vote on negative rates

Headlines

At its second monetary meeting of this year, the CNB Board decided to leave rates unchanged and, as expected, did not even vote on putting negative interest rates in place. While a lengthy discussion on negative rates is said to have taken place, it did so in an economic context rather than at implementation level. The CNB Board also confirmed its exchange rate commitment and, in addition to reiterating 2017 as the earliest possible year for discontinuing its exchange rate policy, indicated that releasing the koruna was “nearer to mid- 2017”. Before this meeting, the discontinuation had been expected anytime during the first half of 2017, whereas now the discontinuation date has effectively narrowed to May (when another new forecast will be available, by the way). This is also the date we currently see as the most likely.

Naturally, all of this is true on condition that the economy – and notably inflation – develops more or less in line with the forecast. This means that the inflation target will be hit at the very beginning of next year, and inflation will stabilise just above this target afterwards. This is probably the greatest weakness of the outlook, as we believe that inflation may not necessarily be so willing to approach the target. One thing in the current CNB’s forecast that could still be argued about is the rapid rise in short-term market interest rates. Accumulating the discontinuation of the exchange rate policy and concurrently a repo rate hike into a fairly short period – when the threat of negative rates is still hanging in the air – is quite courageous. We cannot at all rule out that the CNB will want to facilitate the discontinuation of its exchange rate policy with negative rates in order to curb the koruna. This possible strategy undermines the expectations of the forecast for 2017 even more. Therefore, we still do not expect the CNB to raise rates in 2017 at all.

The following conclusions can be drawn from Thursday’s CNB Board meeting: 1) the koruna will be subject to the existing exchange rate policy for at least one more year, 2) the threat of negative rates is not gone and their likelihood remains the same as prior to the meeting (approximately 40%), 3) CNB Board members significantly different from those currently in office may gradually vote on discontinuing the exchange rate policy and on the future direction of the monetary policy (two members will see their term expire in July, and two in February), and finally 4) the risk of a prolongation of monetary expansion (i.e., another postponement of the exit date from the current FX targeting regime ) in the Czech Republic is certainly not negligible.

Currencies		% chng
EUR/CZK	27.03	0.0
EUR/HUF	313.7	-0.3
EUR/PLN	4.24	-0.7
EUR/USD	1.14	0.4
EUR/CHF	1.09	0.0

FRA 3×6	%	bps chng
CZK	0.27	1
HUF	0.92	1
PLN	1.59	-1
EUR	-0.24	1

GB	%	bps chng
Czech Rep. 10Y	0.44	-5
Hungary 10Y	3.03	5
Poland 10Y	2.84	-2
Slovakia 10Y	0.74	24

CDS 5Y	%	bps chng
Czech Rep.	43	-2
Hungary	150	-1
Poland	88	0
Slovakia	42	-2

CNB only discussed but did not vote on negative rates