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2022/05/19 / Erste Group Research

CEE Special Report | The Last Dance of Czech National Bank

Ales Michl, known for his dovish bias, was nominated to become the next Czech National Bank governor. This triggered visible weakening of the Czech koruna, which required the central bank to intervene and reverse the roughly 2% depreciation against the euro. A hike in June is more than certain, but the magnitude will reflect Michl’s nomination, one way or another. We see the following scenarios as possible: A decent interest rate hike (25-50bp) putting the key policy rate at 6% or slightly above it. Such a hike would not likely trigger an opposite reaction from the new board in August. An aggressive, front-loading hike (75-100bp), although Governor Rusnok emphasized that this is not the way the central bank works. Such a move may, however, open up speculation on a quick reversal in August (at least a partial one), under the condition that three other board members will share the dovish approach of the new governor.

The overall composition of the new board will be crucial for the monetary policy direction in Czechia. Three board members’ positions will need to be filled by July. That opens space for a major shift in the central bank bias. While the new composition is not yet known, leaving a new governor in a minority within the board is not a likely scenario.

It seems clear that the Czech koruna is sensitive to the future monetary policy direction. At this point, there are clear risks for the Czech koruna to remain relatively weak vs. the euro. First, inflation keeps rising and the peak of inflation is still ahead. Second, Michl’s announcement on the stability of rates scenario, despite rising inflation and real interest rates becoming more negative, puts pressure on the exchange rate. All in all, most of the factors suggest that higher EURCZK levels are more likely, mainly this year.

We expect a correction in yields, as their current levels seem too high to us. It is possible that some investors are waiting for the expected end of the hiking cycle in June, but the current levels (at least yields of bonds with longer maturities) are still hard to explain, given the outlook of the Czech economy.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Czech Republic
Currency in focusCzech Koruna
Sector in focus-


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