Czech bonds inched higher yesterday as they tracked German Bunds. The yields fell some 3 bps across the board. Nevertheless, reversal of the previous negative price action didn’t lure attention of investors thus the market remained thin.
Today all eyes will be on central bank meeting. The CNB Board should cut interest rates by an additional 25 bps at its long-anticipated monetary policy meeting, and this means that the repo rate will again drop to an all time low of 2%. Thus the rates in the Czech Republic will again be on a par with Eurozone rates. Compared to previous weeks, however, the likelihood of the rate cut has decreased. Evidence of this is the rise in short-term interest rates on the interbank market. The reason is the significant correction of the previous appreciation of the koruna, which is currently the main motivation for a rate cut. However, even though this pressure has partly eased, there are still many reasons to cut rates. Above all, very low inflation is anticipated and actual inflation is already below the inflation target. What is more, even after the correction, the koruna is still as strong as in late January, when the Czech National Bank surprisingly cut rates. Governor Tůma, who confirmed that rates would probably be cut again, also encouraged expectations of a rate cut. If the central bank fulfill the expectations the bonds won’t react significantly. However, other decision might trigger a sell-off.
(CSOB - Investment research)