Czech National Bank likely to hike 2W repo rate to 0.50 in 2017 – Erste Group Research

Czech economy’s monetary conditions have been tightening gradually since the exit from the FX cap. Other than the appreciation of the Czech koruna, the Czech National Bank increased the 2W repo rate by 20 basis points in August. This decision is expected to have been motivated mainly by the overboughtness of the koruna along with the favourable development of the Czech economy and the double-digit year-on-year growth in property prices, noted Erste Group Research.

Following the positive and considerable surprise in the second quarter data, the possibility of another hike by the Czech National Bank has risen noticeably. The economic growth of 4.7 percent and the average real wage growth of 5.3 percent year-on-year pose a significant pro-inflationary risk, which along with the situation around the overboughtness of koruna and substantial property price growth, creates space for an additional hike to 0.50 percent in 2017, stated Erste Group Research.

“In 2018, we expect the CNB to increase interest rates twice, as a consequence of the current pro-inflationary environment. In 2019, we expect the main interest rate to arrive at 1.25-1.5 percent, i.e. 1-2 hikes during the year”, added Erste Group Research.

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