Komerční banka’s economic forecast: Taming the inflation shrew

The Czech economy stepped into 2022 with the highest inflation since 1998. The CNB is fighting the inflation by hiking rates quite aggressively. The rates will peak in the coming months. The real economy started this year nurturing hopes that the shortage of materials and components for manufacture would gradually subside. The country may reach its pre-pandemic economic level by mid-2022.

According to Komerční banka’s updated forecast, the Czech economy experienced a growth of 3.1% last year. This year, it is set to increase to 4.9%. While the euro area reached its pre-pandemic economic level towards the end of last year, the Czech Republic will be approximately six months later.

26. 1. 2022 10:30

“In the pandemic crisis, we have suffered for the industrial nature of our production and, in particular, the country’s heavy focus on automotive”

Jan Vejmělek, Komerční banka’s Chief Economist

The industrial sector was primarily the one that has been heavily hit by disrupted supplier chains. “At the end of last year, we began seeing the first signals of a potential improvement. And it seems that with the onset of this year, the problem with the shortage of chips for the manufacture of vehicles is slowly beginning to weaken. Thus, automotive can be this year’s dark horse,” Jan Vejmělek illustrates the encouraging prospects for Czech industry.

The prices of virtually everything have surged, and inflation is therefore omnipresent and is reflected in the swelling inflationary expectations. There is not one single cause behind the rise of inflation. The prices are surging for reasons on the supply and demand side due to external and internal factors. Because of the pandemic, during last year the limited production and reduced inventories and order books clashed with demand, which did not, despite the pandemic, weaken materially thanks to the extremely relaxed monetary and fiscal policies. This situation was exacerbated by the specificities of the energy and automotive sectors related to the transition to greener production. “We have raised our forecast of this year’s average inflation dramatically to 8.8%,” says Michal Brožka, Komerční banka’s economist. Thus, this year’s inflation will be the highest since 1998 when the country was tackling the impact of the 1997 monetary crisis. “If the tense situation in supply chains improves during the year, the slowdown of inflation in the second half of the year should be significant,” adds Michal Brožka. The increased inflation overflowing into a much quicker growth of nominal wages is a risk.

The central bank will continue to tame the inflation and the expectations of its further development. “In the coming months, it will therefore continue with rate hikes; we consider that rates will peak at 5% in May,” forecasts Martin Gürtler, Komerční banka’s economist. The main reason is the inflationary outlook for the first few months of this year, when the growth of consumer prices is set to attack 10%. Both our forecast as well as the CNB’s expectation indicates this. “Nevertheless, the inflationary pressures should weaken in the second half of this year and the central bank might then start to cut the rates back to the politically neutral 3% at the end of this year,” adds Martin Gürtler.

Last year, inflation became a phenomenon that returned to many countries in many, even dozens of years. Rising inflation surpassed all expectations also in the world’s main economies, such as the US and the euro area. There too the development of prices was reflected in central banks’ policies. “We expect the first rate hike in the US as early as March, and in the euro area at the end of 2023,” clarifies Jana Steckerová, Komerční banka’s economist.

While the fierce tightening of monetary conditions has been apparent since around mid-2021, on the side of the fiscal policy it will, following the installation of the new Government, be next year’s story only. For the time being, we expect the national budget with a deficit of CZK 300 billion this year. Because of the increased uncertainty caused by the only ‘provisional’ budget, planned until the end of March, we have updated our outlook with only moderate changes. “We expect the improved macroeconomic situation, which will contribute to higher tax revenues, to be the key factor helping to cut the deficit from last year’s record of CZK 419.7 billion to this year’s CZK 300 billion,” notes Jaromír Gec, Komerční banka’s economist.

The dollar will not allow the koruna to appreciate too much. We consider that the rising market rates and the development of the US dollar will continue to be the main drivers of the koruna’s further direction. The interest rate differential, the width of which has broken all records, will push the koruna to stronger levels. The US dollar will forge ahead in the opposite direction and will strengthen to the euro even more from its current levels.

“We expect, on the whole, that as the Fed starts to normalise its rates the koruna will first correct the gains from the beginning of this year and approach the CZK/EUR 25 level again. Thereupon it will appreciate slightly to 24.8, reaching this level towards the end of this year,” forecasts Jaromír Gec.

Macroeconomic forecast

GDP (real growth, yoy in %)
Household consumption (real growth, yoy in %)
Fixed investment (real growth, yoy in %)
External trade balance (CZK bn) (*)
Industrial production (real growth, yoy)
Retail sales (real growth, yoy in %)
Wages (nominal growth, yoy in %)
Unemployment rate (MPSV, in %)
Inflation (yoy in %)
3M PRIBOR (average)
2W Repo (average)
CZK/EUR (average)


Jan Vejmělek
Hlavní ekonom Komerční banky
tel.: +420 222 008 568