Czech Republic: Recession and disinflation will prompt the CNB to pivot in Q2

We think rapidly deteriorating demand and easing commodity prices will prompt the Czech National Bank (CNB) to start cutting rates at the end of Q2.

What you will learn:

• With real incomes plundered by high inflation, the labour market already weakening, and the effects of earlier monetary policy tightening fully feeding through, we expect demand pressures won’t push up inflation.
• On the supply side, easing energy and food prices will gradually filter into domestic disinflation. We’ve previously estimated that inflation in the Czech Republic was mostly imported rather than domestically driven.
• Overall, we expect 125bps of cuts in 2023. We expect the first cut at the June meeting, by which time inflation should be falling sustainably, while growth is likely to underwhelm. We argue consensus underestimates the depth of the nascent downturn, while expecting much slower disinflation.
• We see the exchange rate as the key risk. But the main adverse factors for the Czech koruna (CZK) – geopolitical risk and yawning current account deficit due to soaring energy import prices – should ease in 2023, with gas prices already falling to the pre-invasion level in January.