Debut of the 2038 floater

Issuance activity: Tomorrow, MinFin is scheduled to auction CZK2.0bn of 2038 floater. This is the first tranche of the new paper. Along with the 2043 floater, MinFin is slightly expanding its range of securities with variable interest rates. In general, floating CZGBs account for only about 9% of marketable state debt, playing a relatively minor role in the public debt management.

Market situation: Czech May CPI inflation was confirmed today at 2.4% yoy in the final release beating the CNB’s 2.3% yoy forecast. Overall, we assess the balance of risks of the new data compared to the last CNB forecast as mixed: CPI structure pointed to the risk of continued core stickiness; 1Q25 wages were roughly as CNB expected, 1Q25 GDP structure was anti-inflationary (lower consumption, higher investment; while headline GDP qoq growth was 0.2pp higher) and EURCZK is stronger (lower).

Rates outlook: Our baseline forecast is for the CNB to cut interest rates by 25bp in August and November, which would bring the base rate to 3% by the end of the year.  However, we believe that the latest data reduce the likelihood of further CNB rate cuts in the coming months. While we still consider a 3% repo rate by the end of the year to be realistic, we are less certain about the timing of the cuts, as sticky core inflation remains a concern. As a result, another pause in August poses a risk to our forecast.

Author: Jaromír Gec