CZK: Changing our central bank call to a 50bp rate cut
The blackout period for the Czech National Bank (CNB) began yesterday and we will therefore probably not hear anything more. Deputy Governor Jan Frait really moved the market when he said he was open to a larger rate cut, even more than 50bp at the 8 February meeting. We do know that the deputy governor was one of two board members who voted for a rate cut back in November when the CNB left rates unchanged. So the new statements aren't exactly a game changer, but we have confidence that at least two members will push for a 50bp rate cut at next week's meeting. In addition, the board will have a new forecast which we think should show very low inflation of below 3% for the upcoming months. Overall, this leads us to reassess our call from a 25bp to 50bp rate cut next week.
The acceleration of the rate cut is bad news for the CZK. However, we believe positioning has been heavily short here for some time and should not be so damaging. Moreover, the market is already pricing in a large portion of the rate cuts. Therefore, we do not expect significant weakness from this, but of course a short trip above 25.0 EUR/CZK is likely next week.
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