WOOD Flash – Czech Republic macro: domestic and external demand decoupling weakens case for interest rate hikes

The Bank Board at the CNB decided to keep interest rates unchanged at its meeting yesterday (24 March), remaining in line with what we were expecting. The tone of the statement remained tilted towards the dovish side, vs. the tone conveyed towards the end of last year. Greater emphasis was put on the magnitude of the risk and uncertainty that the pandemic is now putting on the bank’s baseline forecast. In our view, the domestic conditions, so far, do not necessitate the need for monetary tightening this year; while, on the other hand, exports have recovered rapidly, and the industrial sector is already operating at a capacity close to the pre-pandemic levels. Due to this, the sector remains well-positioned to capitalise on the broader global recovery that we expect later this year, creating further room for more CZK appreciation, which would weaken the need for monetary tightening this year, in our view.