Rationale: The CNB board has doubled down on its policy to keep interest rates stable, judging from the language it used at the latest MPC meeting on Dec 21, 2022, when the policy rate was left at 7%. The statement suggested that demand pressure has started easing, and that cost pressure is what remains the primary inflation driver. The CNB board believes that interest rates are at a level high enough to push down demand pressure and cool off the economy. Inflation is expected to ease next spring, along with a reduction in global inflation pressure. The board also considers inflation as developing in line with the forecast, obviously discarding the statistical office's decision to account for the subsidised energy tariff for households in Q4 2022.
The January inflation print, as well as core inflation data, seem to support that narrative. This applies particularly to core inflation, which eased for the third consecutive month and is currently at an 8-month low, even though it is nominally still very high. The CNB board doesn't appear very concerned about second-round effects from energy price hikes in 2022, and we have heard a message from the board majority that inflation is mostly provoked by the war in Ukraine, against which the CNB cannot really do much.
Given the message coming from the CNB board, we don't see a shift in policy any time soon. The vote in December was once again split 5-2, though this time the dissenters (Mora and Holub) voted for a 50bp hike, as they apparently also see somewhat smaller inflation pressure. This could also have been an attempt to win over some board members, though apparently without a success. Given that the board make-up will remain unchanged at the next MPC meeting on Feb 2, 2023, we don't see the board voting differently. The two new members - Prochazka and Kubicek - will take over as of Feb 13, 2023 and their first MPC meeting will be the one on Mar 29, 2023. The thing is, we don't expect anything to change much, as President Milos Zeman was pretty clear that he wouldn't like to see more rate hikes, so the odds are that the two new members will not stray from the present policy course.
Regarding those already on the board, literally the entire 5-member majority on the board doubled down on the message from the post-meeting press release. We have seen some members leave the door open for more rate hikes, provided that demand pressure remains high, but we wouldn't read that much into it. The narrative seems to focus on recent economic data, which suggest that household spending is declining rapidly, while at the same time wage negotiations keep leading to tolerable nominal wage growth, so there is no wage-price spiral emerging. The message we have been hearing thus far is that the current level of interest rates is sufficient, and if it happens that it is not, then interest rates will remain at this higher-than-usual level for a longer period than currently anticipated. Thus, we don't see a shift on the board before economic data shows unequivocally that inflation has become sticky, despite all measures applied thus far.
We continue to expect stable rates for a prolonged period of time, especially if core inflation remains sticky, which we strongly believe is going to be the case. While there will be some deceleration due to base effects, we expect that core inflation will be above the 2% target for some time, likely longer than currently anticipated. This is why we don't expect a lot of monetary easing in 2023, and we lean towards cumulative cuts of 50bps, most likely in Q4 2023. Naturally, there are a lot of risks to this projection, and major geopolitical developments can easily shift this outlook in any direction. Assuming there will be no major breakthrough in the war in Ukraine, and that global supply chains will never recover to 2019 levels, the odds are that the CNB will remain pretty inactive in 2023.