EURCZK: The CNB remains dangerously silent

Macro, FX, Rates: The CNB remains dangerously silent

(CZ) Rates: Although there is only days left to the start of the CNB's informal blackout period ahead of the next Bank Board meeting, we have not heard any significant comments from Board members. Unlike the time before the June meeting, when almost the whole board expressed its opinion on the monetary policy, the CNB is not saying very much this time. At the same time, the August meeting is already just around the corner and the market sentiment is choppy. The koruna has already tested the 26.00 EUR/CZK threshold and definitely does not want to move away from it.

Interestingly, despite "the potential impact of financial investors closing their koruna positions on the development of the exchange rate in the coming quarters" the CNB still sees the current level of the exchange rate level as pro-inflationary. Investors, however, might see it a little differently, and in particular, they would welcome any potential rise in interest rates, which governor Rusnok spoke about after the June Bank Board meeting.

Importantly, while the CNB may be preparing for the first hike in official interest rates, the ECB continues taking a time out. Still, our sense is that upcoming (EMU) data are likely to confirm the increasing strength of the upswing in activity and may also suggest a tentative firming of inflation. In such circumstances, it could be expected that, at its September meeting, the ECB would signal an intention to taper, or in its language to ‘recalibrate', its asset purchase programme and Mr Draghi could even provide some indications in this regard when he speaks at the high profile Federal Reserve Jackson Hole conference in late August. Of course, a more uncertain backdrop could push these announcements back to the following ECB governing council meeting on October 26th.

Such a delay, however, presents a dilemma for the CNB, whether to dare to widen the interest rate differential and even to push the koruna in this way to an even higher level or rather to wait. From our point of view, waiting a few months will not cost (the Czech economy) anything, because the only things that the central bank is "worried" about in the first place are housing prices. In this respect, a slight CNB repo rate adjustment (from 0.05% to 0.25%) will not change them especially not when they are mainly the result of extremely lacking housing construction. How it will end up (next Thursday) hangs in the balance because there are surely enough arguments on both sides. So the outcome of the August meeting of the CNB can only be guessed now. But maybe someone from the CNB Board will give a last-hour cue what will happen next Thursday...