The Czech National Bank (CNB) left interest rates unchanged at today's meeting, as the Czech economy is recovering more quickly than originally expected. However, the recovery itself is still on shaky ground. We thus expect interest rates to remain low until the end of next year. Unconventional monetary policy instruments are not currently on the table, according to the CNB governor.

The Czech National Bank (CNB) left interest rates unchanged at today's meeting, as the Czech economy is recovering more quickly than originally expected. However, the recovery itself is still on shaky ground. We thus expect interest rates to remain low until the end of next year. Unconventional monetary policy instruments are not currently on the table, according to the CNB governor.

Further monetary easing may not be necessary

The CNB left interest rates unchanged today. All members of the bank board voted in favour of this decision. The key repo rate thus remains at 0.25% and the discount and Lombard rates are also unchanged. Today's decision is certainly not a surprise for the market, as none of the analysts surveyed by Bloomberg expected a change.

Central bankers also suggested in recent statements that their position had not changed since the previous meeting. The CNB is waiting to see how the Czech economy develops. Current signals are rather optimistic and suggest that further monetary easing might not be needed. However, there is a big risk that the economic recovery may falter or further lockdowns may be implemented due to the renewed spread of the coronavirus.

Current koruna appreciation is also a risk

Another risk is the ongoing strengthening of the Czech koruna, which has already approached EUR/CZK 26 and is thus stronger than the central bank had anticipated in its new forecast. Although a stronger koruna will probably help to push down high inflation, it will also make the situation more difficult for Czech exporters, which, despite a slight improvement, are still plagued by insufficient demand.

It is the export-oriented industry that will be the focus of economic policymakers for the rest of the year. Today's figures for Czech industrial production and German factory orders in June were a positive surprise, suggesting that the recovery in industry could also be faster than originally expected. Even so, industrial production remains significantly lower than last year and it is therefore too early to reach optimistic conclusions.

Interest rates will remain low for longer

The ongoing recovery of the Czech economy is thus built on weak foundations for the time being. This is the reason why interest rates will likely remain low for longer, probably until the end of next year. Central bankers do not want to rush to tighten monetary policy, as it could jeopardise the economy's return to growth.

The forecast the CNB presented today envisages one rate hike in 4Q21. However, CNB Governor Rusnok admitted at today's press conference that he sees interest rates remaining at the current level for an even longer period than the model forecast shows, due to the above-mentioned vulnerability of the ongoing economic recovery.

The governor also mentioned that the bank board did not discuss the use of unconventional instruments at today's meeting in the event of the need for further monetary easing. This is in line with what we reported before the meeting (see https://bit.ly/30wNa2S).

CNB sees inflation at above 3% until year-end

The central bank’s forecast of economic growth has remained almost unchanged for this year; it still expects GDP to decline about 8%. However, it lowered the outlook for next year by half a percentage point to 3.5% growth. According to central bankers, the pre-crisis level of economic activity will not return until end-2022. We are more optimistic, as we expect the economy to contract 5% this year and rebound 6% next. We thus expect the economy to return to its pre-crisis levels a year earlier, by end-2021.

The biggest change from the CNB today was in its forecast for consumer prices. The central bank now expects inflation to remain above the upper limit of the tolerance band until year-end. The bank raised its inflation forecasts by 0.8pp for 3Q20 and as much as 1.0pp for 4Q20, with a stronger CZK than previously expected.

The main reason it expects inflation to be above 3% is higher core inflation and rapid growth in food prices. Retailers are already raising prices due to higher costs incurred to comply with government measures to slow the spread of the coronavirus. The economy will thus show stagflation-type features, according to the CNB. We expect inflation to slow over the rest of the year, due mainly to weak demand, as we think unemployment is likely to rise. Disinflation is already evident abroad, and the Czech Republic will thus import some of this lower inflation. This will also be impacted by the CZK, which we expect to be stronger than in the CNB forecast. Central bankers view the risks to the CNB's new forecast as balanced.

Announcement date: Tuesday, 11 August 2020, 8:00 a.m. CET

Announcement date: Tuesday, 11 August 2020, 8:00 a.m. CET

Expected financial results: This year, the sale price of electricity for which CEZ sells should be just below EUR45 / MWh. This means an increase of about 15% compared to the price for 2019 (35 EUR / MWh). Nevertheless, we expect lower results compared to the same period last year. This is due to the fact that much of the second quarter was affected by the economic downturn due to restrictive measures related to the coronavirus pandemic. This had an impact on the decline in demand, which affected the distribution, sales and mining sectors in particular.

Traditionally, one of the most monitored items will be CEZ's full-year management guidance. Please note that CEZ slightly adjusted its original projections for this year on 12 May, together with the publication of the first quarter report. The current target for EBITDA is CZK61-64bn (original CZK63-65bn) and for net profit CZK19-22bn (original CZK21-23bn). Of course, there is a risk that there will be a revision again, but given that the targets were reduced in mid-May, we do not expect further adjustments.

According to our estimates, total revenues for the second quarter fell 3.7% to CZK46.4bn. Unfortunately, the higher price of electricity sold failed to compensate for the decline in demand in the distribution and sales segments, where we expect an annual decline in sales of approx. 10%. Coal sales should also fall due to lower production in coal-fired power plants. We also expect an increase in personnel costs, which is based on a higher number of employees. EBITDA should reach CZK11.3bn and net profit CZK1.9bn.