WOOD Flash – Czech Republic macro: CNB gets ahead of the curve with a 75bps hike

At its meeting yesterday (30 September), the Bank Board at the CNB decided to raise the key rate (2W repo) by 75bps, to 1.50%, exceeding both our and the consensus expectations (50bps). At the same time, the corridor around the key rate was restored to its pre-pandemic state of +-1ppt on both sides and the Lombard rate (ceiling) was raised by 75bps, to 2.50%, while the discount rate (floor) was increased by 45bps, to 0.50%. Explaining yesterday’s move, it was noted that upside risks for the inflation outlook have increased markedly, amidst the persisting global supply-side pressures and labour shortage, which are also affecting inflation in the same direction. Moreover, the tone from the Governor during the press briefing was towards the hawkish side and suggestive of a resolute tightening cycle well into the next year. Looking ahead, the odds for our high-inflation scenario, which expects a terminal rate of 3.75% by end-2023E, have increased substantially after yesterday’s hawkish signal; however, we have not yet established it as our baseline scenario. With this said, we expect the key rate to increase to at least 3.00% by the end of next year.