Today’s CNB meeting will be exciting again. The CNB will raise interest rates by at least 50 bps (our baseline scenario), but there will also be a more aggressive step in the game. Why? Mainly because the latest inflation figures were again surprised by higher growth and jumped to 4.9% in September. The latest forecast assumed growth of only 3.2%. In addition, core inflation adjusted for higher energy prices grew even faster, jumping to 5.8% in September (the CNB expected levels of around 3.5%). In addition, despite the CNB’s aggressive move, the koruna remained on the defensive after the last meeting, and at the moment it is also visibly weaker than the latest forecast suggests – this is just another argument for a more aggressive move forward towards the “normal rate”.
In addition to the decision itself on the size of today’s rate hike, it will be important what the new forecast will look like and what Governor Rusnok’s accompanying comments will look like at the press conference. The new forecast is likely to confirm the need for a rapid increase in rates towards “normal waters”. The question is how the Bank Board will react to the implied trajectory (will it perceive risks as pro-inflation?), And above all how high the central bank will see the peak of interest rates. Until now, the majority in the Bank Board agreed that interest rates should be brought “only” to a neutral level between 2.5 – 3%. It would be a surprise for us and for the markets if this assumption changed significantly …
Today, the Czech koruna will be met by a CNB meeting, which in itself can mean a positive impetus. On the other hand, short market rates are already relatively high at the moment (there is little room for positive surprises). In the end, the koruna was not too frightened by the Fed meeting, after which its boss Powell sent a relatively dovish comment, supporting the shares and slightly weakening the dollar.
The US Federal Reserve began the process of normalizing monetary policy, announcing, as expected, a gradual reduction in bond purchases to its balance sheet in the order of 15 billion per month. However, this step does not mean that there will be a radical change in the thinking of central bankers within the Fed, which would lead to a significant change in rhetoric direction under the weight of high inflation. Fed Chairman Powell still clings to the mantra of the temporary nature of high inflation, arguing that the second macroeconomic goal (full employment) has not yet been met. Interestingly, Powell also refuses to clearly define what the term “full employment” actually means, and refers to a series of indicators that Fed leadership is reportedly monitoring.
In essence, the dove’s message from Powell (still waiting for President Biden to rename him to the post of Fed chairman for another term) was slightly offset by a cautious warning in the commentary on the FOMC decision. This is because the Fed could accelerate the reduction in bond purchases. And such a possibility can easily occur in the coming weeks, as headline inflation (CPI) will already oscillate around 6% and, as yesterday’s ADP report (or ISM) indicated, labor market data will probably be very good. For the eurodollar, this means that the currency pair could rather stagnate in the short term and then head south. Given the ECB’s ultra-dovish position (see Lagarde’s statement yesterday that there will be no rise in interest rates in 2022), the outlook for the euro is very weak.
However, the situation on the euro-dollar market could indirectly affect the Bank of England today, if its meeting generates an increase in official rates (+15 basis points are considered).
The Polish central bank surprised with a radical increase in interest rates, when the new inflation forecast, which assumes that average inflation will be 5.8% next year, has clearly spoken out. The inflation target, which according to NBP Governor Glapinsky will still be respected by the central bank, is 1.5-3.5%. For the zloty, the NBP’s aggressive policy is, of course, a blessing, despite the fact that the NBP’s commentary still refers to possible FX interventions (but now their context may be different, or the NBP rather reserves the right to steer the course on both sides). However, the increase in interest rates will almost certainly continue in December, the question is how significant it will be. In any case, it will be good to wait for the result of November inflation (30 November) with an estimate of a further increase in NBP rates.