The CNB left interest rates unchanged at today's meeting. According to Governor A. Michl, rates will either remain unchanged or rise at the next meeting in May. However, the latest hawk has already voted for a hike of "only" 25bp this time, while only last time the hawkish minority suggested a hike of 50bp. Our forecast is that the repo rate will remain at the current level of 7% until at least August and then fall to 5% by the end of the year. However, we see risks of both rates remaining at current levels for longer and then falling more gradually. The tone of today's press conference also implied this direction, with the governor again pushing back against market bets for repo rate cuts of around 100 bp by the end of the year. He also stated that the koruna could be stronger. The central bank's commitment to prevent "excessive" fluctuations of the koruna also remained in place.

The CNB left interest rates unchanged at today's meeting. According to Governor A. Michl, rates will either remain unchanged or rise at the next meeting in May. However, the latest hawk has already voted for a hike of "only" 25bp this time, while only last time the hawkish minority suggested a hike of 50bp. Our forecast is that the repo rate will remain at the current level of 7% until at least August and then fall to 5% by the end of the year. However, we see risks of both rates remaining at current levels for longer and then falling more gradually. The tone of today's press conference also implied this direction, with the governor again pushing back against market bets for repo rate cuts of around 100 bp by the end of the year. He also stated that the koruna could be stronger. The central bank's commitment to prevent "excessive" fluctuations of the koruna also remained in place.

In line with expectations, the Czech National Bank again left interest rates unchanged. The base repo rate thus remained at 7%, where it had been since last June. Today, the new members of the bank board, J. Kubíček and J. Procházka, attended their first monetary policy meeting, replacing M. Mora (who had supported the rate hikes before his departure) and O. Dědek on the central bank's board starting 13 February.  Six members of the Bank's Governing Council voted to keep interest rates on hold, while one member voted for a 25-basis-point increase. Compared to the February meeting, the majority that did not support a further hike strengthened (from 5:2 to 6:1) as a result of the recent change in the board.

Governor Michl said that interest rates in the coming months were likely to be higher than the financial market had priced in before the meeting. Investors have been expecting rate cuts of around 100bp by the end of this year, with the first of these cuts likely to come as early as 2Q23. The governor also repeated, as at previous press conferences, that rates would either remain unchanged or rise at the next meeting.

The Board assessed the risks to the latest forecast as significant and going in both directions. According to the central bankers, inflation is expected to fall significantly to single digits in the second half of this year and to be close to the 2% target in 2024. However, this scenario of the CNB forecast is based on the repo rate averaging 7.8% in 1Q23, which is almost one percentage point higher than reality. On the other hand, the central bank is bolstered by a stronger koruna. Its exchange rate against the euro averaged EURCZK 23.80 so far in Q1, while the central bank had expected EURCZK 24.10 (i.e. a 1.3% weaker level). The decline in household consumption at the end of last year was also more pronounced than the CNB's latest forecast, at -5.5% yoy compared to the bank's expectation of -3.3% yoy. Wage growth and inflation, especially its core component, were broadly in line with the central bank's short-term forecast.

It is likely that the CNB's new forecast, to be published in early May, will, due to the aforementioned data, show the approaching start of the monetary easing process. The February forecast already included a return of the repo rate to its current level (from the forecasted 7.8%) in Q2 and then a further decline to an average of 5.8% in 4Q23. In our view, the fact that the last proponent of a rate hike on the bank's board (presumably T. Holub) only supported a standard 25bp hike this time even though he had suggested 50bp in February also indicates that the CNB has probably already missed the right moment to raise rates further.

We expect the CNB to keep the repo rate at the current level of 7% at least until August this year, when it could start to gradually lower it. In the baseline scenario of our January forecast, we estimated the repo rate at 5% at the end of this year, reaching a policy-neutral 3% by the end of 2024. However, the start of the rate cuts is subject to a high degree of uncertainty. In our view, it will depend on the development of the domestic economy and inflation, as well as on the policies of foreign central banks. We see the risks to our forecast as skewed to the upside. However, we are more concerned that the repo rate could remain at 7% for longer than we expect than that it could rise further.

In our view, the main arguments for keeping rates at current levels for longer are unanchored inflation expectations and accelerating wage growth. January's industrial and construction data showed that wages rose by more than 10% yoy. In line with this, consumer demand increased slightly in the same month. On the other hand, industrial production contracted sharply at the beginning of the year, raising the risk of a third consecutive qoq contraction in GDP. Regarding inflation expectations, according to the CNB's December survey, non-financial corporations expect inflation of 10.1% yoy in the one-year horizon and 7.0% yoy in the three-year horizon. This is slightly lower than in the September survey (10.3% for 1 year and 7.5% for 3 years), but still well above the 2% inflation target. The price dynamics observed also remain persistent. Despite a further sharp decline in household consumption in 4Q22, core inflation reached around 9% in February on a seasonally adjusted monthly annualised basis.

Philip Morris CR (PMCR) today announced its financial results for the second half of last year and for the full year. Full-year revenues increased +11.0% to CZK21bn. Sales of smoke-free products and favourable price developments had a positive impact. Net profit increased +3.4%, to CZK3.6bn, due to the improved financial result. PMCR management proposes a dividend of CZK1,310 (gross yield of +7.4%). The reported figures are in line with our estimates.

Philip Morris CR (PMCR) today announced its financial results for the second half of last year and for the full year. Full-year revenues increased +11.0% to CZK21bn. Sales of smoke-free products and favourable price developments had a positive impact. Net profit increased +3.4%, to CZK3.6bn, due to the improved financial result. PMCR management proposes a dividend of CZK1,310 (gross yield of +7.4%). The reported figures are in line with our estimates.

PMCR's revenues increased +11.0% yoy to CZK20.95bn. In the Czech Republic, sales increased +13.4% to CZK12.7bn. Growth was driven by higher sales of smoke-free products and favourable pricing on conventional cigarettes. By contrast, sales of traditional tobacco products declined. The total combined market share remained stable yoy at CZK17.3bn, mainly due to higher sales in border areas affected by pandemic restrictions in 2021. The combined share of PMCR decreased from 41.8% to 40.1%. This was driven by a decline in the cigarette share, from 30.7% to 26.7% a year ago. The decline is due to smokers switching to new technologies. On the other hand, the share of heated tobacco products increased to 13.4% (11.1% last year). In Slovakia, sales increased +7.2% to EUR233m. The reasons are similar to those in the Czech Republic: Higher sales of smoke-free products and favorable price developments. The total combined cigarette and refill market in Slovakia grew 1.3% to 7.4bn units. Philip Morris Slovakia's market share declined slightly by 0.5pps to 55.5%. The share of traditional cigarettes declined to 40.0% (43.7% in 2021). However, as smokers switched to new technologies, the share of smokeless products increased to 15.5% (12.3% last year). Due to the closure of a factory in Kharkiv, Ukraine, manufacturing services (exports) also increased +8.4% to CZK2.4bn. The war in Ukraine resulted in the closure of the plant in Kharkiv and the transfer of some production to Kutna Hora, as well as short-term production disruptions due to supply problems. PMCR also uses natural gas as a heat source. Last year, PMCR had fixed prices, but prices are expected to increase in 2023. Due to the robust cash position and high interest rate environment, PMCR delivered a positive financial result. Net income increased by +3.4% to CZK3.6bn.

Dividend: For the past year, PMCR management proposes to pay CZK1,310. This is slightly below our estimate of CZK1,330. The dividend must be approved by shareholders at the Annual General Meeting on April 28. The proposed dividend represents a gross yield of +7.4%. The last trading day with rights to dividend will be May 8, 2023. The dividend is expected to be paid on June 12, 2023.