Czech Republic Macro Outlook
The development of the Czech economy should remain favorable, as GDP growth is expected to arrive at 3.6% in this and 3.1% in the next year. Economic activity will still be supported by economic recovery in the Eurozone and sound development of domestic demand. Compared with the previous year (4.5%), GDP growth will slow down, mainly due to tighter monetary conditions (higher interest rates and stronger koruna).
Average headline inflation should remain close to the 2% inflation target both this and next year. In April, headline inflation arrived at 1.9%, mainly due to proinflationary pressures stemming from solid domestic demand, increasing labor costs and food prices. However, these factors are mitigated by an increase in labor productivity, which is supported by high investment expenditure on the part of firms, as well as the koruna appreciation (from the mid-term point of view) together with higher interest rates.
For the rest of this year, we expect the CNB to increase interest rates once and see the November meeting as the most likely scenario. However, due to the current proinflationary factors, we see the probability for November as only slightly above 50%. The risk is significantly tilted towards an earlier interest rates increase. In this respect, we see the probability of a hike in 3Q (August or September) as close to 45%.
As we expect no major negative surprises in the data, at least one additional 25bp hike in the rest of this year and two interest rate increases in 2019, the gradual appreciation of the koruna is expected to continue. More specifically, we expect the EURCZK to reach approx. 25.0-25.1 at the end of 2018 and 24.5 at the end of the next year.
For the rest of 2018 and 2019, we expect yields on Czech bonds to continue to gradually increase. Higher CNB rates will be the most important factor behind this development.