2025 CZGB Issuance Season Reaches Half-Time

Issuance activity: Tomorrow, MinFin is scheduled to auction CZK5.0bn of 2033 bonds, CZK4.0bn of 2036 bonds and CZK1.0bn of 2044 bonds. MinFin has issued CZK170.2bn in primary auctions and an additional CZK10.4bn and EUR250mn in the secondary market thus far this year (vs full-year plan at CZK350-450bn). MinFin’s Fiscal Forecast (https://www.mfcr.cz/en/fiscal-policy/macroeconomic-analysis/fiscal-forecast-and-fiscal-outlook/2025/fiscal-forecast-of-the-czech-republic-may-2025-59935) implies that, without additional consolidation measures, the fiscal trajectory set by the Law of Fiscal Responsibility will not be met. Given the Czech rules are stricter than those set by the EU, overall public debt is relatively low at 43.6% of GDP and the poll-leading opposition parties have not expressed a strong desire for further measures, the upcoming general election in the fall may therefore halt fiscal consolidation. As a result, fiscal deficits staying closer to current levels (2%+ of GDP) seem more likely than the structural deficit decreasing further to the 2028 goal of 1%, set by the current legislature.

Market situation: On the Czech data front, PPI fell by 0.6% mom in May, continuing the previous three-month series of mom declines, mostly because of a decline in energy prices. 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). The CZGB market continues to be mostly driven by global developments with little idiosyncrasy.

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 CPI data reduce the likelihood of further CNB rate cuts. 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