Czech bonds erased part of their previous losses yesterday, but trading activity was again softer. The fact that neighbouring central banks (NBS and NBP) left interest rates unchanged, which improved the sentiment. Paradoxically, however, the yield curve flattened in a bullish way as the long end fell by 5 bps.
Today, all eyes will be on CNB Bank Board. A very small part of the market thinks that CNB could deliver a 25 bps rate hike already today. We do not agree. First, despite the current turmoil in emerging markets the Czech currency remains amazingly stable and strong. Secondly, although the year-on-year headline CPI jumped above 3.0 % in May (a long-term target), it should fall back below this level next month. Moreover, CNB Board will not have a new inflation projection today, since the new one will be released in July. On the other hand we have to warn that governor Tuma might deliver some hawkish comments as it is quite clear that a medium-term inflation outlook deteriorates somehow due to rising food prices and expected hikes of regulated prices in housing.
(CSOB - Investment research)