Komerční banka’s macroeconomic forecast – the koruna is looking for its new equilibrium

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Prague, 2 May 2017 – The Czech koruna is floating again. From the perspective of the Czech economy’s expected growth, this does not mean anything important. However, things are different from the perspective of the inflationary development and monetary policy. Inflation will stay above the CNB’s target this and next year. If the crown does not significantly strengthen to less than CZK 26/EUR, we may see the CNB hiking its interest rates this year.

  • The end of the FX floor has introduced volatility to the market. Fundamentally, the Czech koruna is poised for stronger levels. Speculative positions are making it vulnerable.

The Czech economy’s fundamentals suggest that the exchange rate can decline to less than CZK/EUR26 this year. But the crown is vulnerable because of the massive inflow of speculative capital since the autumn of last year. It can weaken, albeit probably only temporarily, in case of any negative shock.

  • Inflation is attacking four-year highs. Achieving the target is sustainable as we believe inflation will stay above the CNB’s target this and next year.

We see average inflation at around 2.3% in 2017 and 2018, and core inflation even at 2.4%.

  • The exit from the FX floor commitment was the first step in returning the monetary policy back to the normal. The next step will entail rate hikes. We expect the technical zero to be abandoned and a rate hike still this year.

If the koruna does not strengthen significantly to less than CZK/EUR26 this year the rate hike will come towards the end of this year. For 2018, we expect rate hikes at each of the four main meetings of the CNB’s Board.

  • A floating crown will not prevent the Czech economy from accelerating its growth this year.

We were not surprised by the relaxation of the FX regime. To date, the ups and downs of the exchange rate have not made us change the outlook for the Czech economy. After last year’s 2.3% the Czech economy will perform better this year; we expect it to grow by 2.7% this year.

  • The Czech economy will grow thanks to all key demand components. Following last year’s decline in investment we expect a moderate positive contribution this year.

The first months of this year clearly confirm that the automotive industry will again be one of the main drivers on the side of production and exports. The economy will continue to be able to rely on strong household consumption.

  • The growing economy will result in further overheating on the labour market. Workforce shortages will prevent investment activity from increasing. Importing manpower from Ukraine, or pensioners, will not save the market for the long term.

The rate of unemployment will decline to the lowest level ever, 3.3% (according to the ILO) and the employment rate will be record high this year. The result will be pressure for continued wage raises. As last year, we expect nominal wages to grow by 4.2% and 4.7% in 2017 and 2018, respectively.

  • Households’ higher earnings are reflected in higher retail sales. Households invest their savings in real estate. Real estate prices are dramatically rising, also because only little construction is taking place, especially in Prague.

Expensive real estate and lack of opportunities for appreciating savings will support consumption. Retail sales will grow by 3.9% in real terms this year, to accelerate to 4.3% in 2018.

Macroeconomic forecast 2016 2017 2018
GDP (real growth, yoy in %) 2.3 2.7 2.7
    Household consumption (real growth, yoy in %) 2.9 2.9 2.5
    Fixed investment (real growth, yoy in %) -3.8 1.4 5.3
External trade (CZK bn) (*) 487 486 474
Industrial production (real growth, yoy) 2.9 7.3 5.1
Retail sales (real growth, yoy in %) 5.6 3.9 4.3
Wages (nominal growth, yoy in %) 4.2 4.2 4.7
Unemployment rate (MPSV, in %) 5.4 4.1 3.5
Inflation (yoy in %) 0.7 2.3 2.3
3M PRIBOR (average) 0.3 0.3 1.0
2W Repo (average) 0.05 0.10 0.88
EUR/CZK (average) 27.0 26.4 25.8

Source: The Czech Statistical Office; the Czech National Bank; Ministry of Labour and Social Affairs; Macrobond; Economic and strategic research, Komerční banka;

Note: (*) external trade as per cross-border statistics; (**) inflation components net of primary impact of tax changes