EUR/CZK: Inflation not falling in 2023 as expected with CNB rejecting rate hikes to hit Koruna – Commerzbank

The litmus test for the Czech central bank's (CNB) credibility and thus the CZK will follow next year. Higher-than-expected inflation alongside the bank rejecting rate hikes would weigh on the Koruna, economists at Commerzbank report.

CNB to leave the key rate unchanged at 7% next week

“The bank is likely to be confident to leave the key rate unchanged at 7% next week, despite a continued rise in prices that was recorded regardless of levels being dampened by the government’s support measures towards energy costs for private households.”

“If inflation does not fall as expected so that real interest rates will become less negative, the CNB will have to decide whether it has to take renewed action and hike the key rate again, a step it has avoided since the last rate hike in June.”

“If inflation were not to fall in 2023 as expected by the CNB with the bank rejecting rate hikes at the same time that would be bad for the central bank’s credibility and CZK.”