The Czech National Bank (CNB) is expected to keep the policy rate unchanged at its monetary policy meeting scheduled to be held on December 22. Recent communications by the central bank suggest that it plans to exit its exchange rate floor of CZK27 to the EUR in mid-2017, conditional on inflation reaching the 2 percent target by then.

Recent inflation developments provide support for the CNB’s plan to exit in mid-2017. November headline inflation registered a sharp increase to 1.5 percent y/y, up from 0.8 percent y/y in October. Inflation has thus returned to the lower half of the CNB’s tolerance band after almost three years. The November figure was above the central bank's prediction of a 1 percent y/y rise in consumer prices, due mainly to a faster-than-expected rise in food prices and core inflation.

Also, it seems that the increasingly tight labour market is accelerating wage pressure, pushing up core inflation. National data showed that unemployment fell further below the NAIRU to 4.9 percent in November, its lowest level since December 2008, and average monthly real wages rose by 4 percent y/y in Q3. The anti-inflationary effect of import prices, stemming from falling industrial producer prices in the euro area, has also started to fade.

"We forecast that higher wage inflation will continue to support core inflation. Furthermore, we expect a rise in oil prices next year to provide further upward pressure on energy prices in addition to already visible base effects in energy inflation. However, if inflation developments surprise to the upside in coming months, an earlier exit at the end of Q2 17 cannot be ruled out," Danske Bank commented in its recent research report.