NewsWeekly FX Market Update: CNB keeps rates unchanged, expects a recession in 2023

The Czech National Bank kept rates unchanged for the third meeting in a row, with the two-week repo rate held at 7%.

The vote followed the usual 5-2 pattern, with two members opting for a 75 basis point increase. The decision was broadly expected and, in itself, had little potential to influence markets. Attention among market participants was, instead, on the bank’s communication and, in particular, its updated forecasts.

The new forecasts imply somewhat lower inflation in 2022 and 2023 than previously expected. The peak is also lower – at around 19% in December this year. At the same time, the CNB now anticipates a GDP contraction of 0.7% in 2023 (vs a 1.1% increase expected in the summer) and weaker growth in the following year (2.5% vs 3.8%). The forecast for market interest rates (3M PRIBOR) was, however, revised higher – the difference is particularly pronounced in 2023 and 2024 (7% vs 5.2% and 5.3% vs 3.1%). These new forecasts also assume a stronger koruna than previously envisioned, not far from current levels.

If the Bank Board were to follow the forecast, it would mean rates would need to rise sharply in December. This does, however, seem unlikely. It appears that the decision-makers prefer rate stability to any significant changes. While governor Michl suggested that the decision at the upcoming meeting will be between stable rates and an increase, barring significant data surprises, we think we’re most likely to see the CNB stand pat on rates through the end of the year and into early 2023.


US dollar rally stalls in spite of hawkish Federal Reserve: Currency market volatility continues to rise, and signs are emerging that the dollar rally is running out of steam.

The Federal Reserve delivered a massive hike and a more hawkish than expected message, while other central banks begin to fret about the impact of higher rates on their respective economies. However, the dollar failed to rally and in fact fell against most G10 currencies, with the notable exception of sterling, which was hobbled by an uber-dovish Bank of England. The star of the week, and also the year so far, was undoubtedly the Brazilian real, a favourite of ours, which put in another scorching rally on the back of the peaceful transfer of power to what looks to be a moderate Lula administration.

All eyes turn now to the critical October CPI inflation report out of the US (Thursday). Headline prices will probably drop further as energy prices continue to moderate, but the key will be once again the more persistent core rate. Beyond economic news, it will be important to see whether signs of China easing its COVID policies are confirmed. As this is written, signs are emerging that last week’s rally in Chinese assets may have been premature.


Read the full Ebury report: CNB November Meeting Reaction

Read the full Ebury report: Weekly FX Market Update