Given the deceleration of euro area’s economic growth and high risks stemming from the likelihood of hard Brexit or protective measures in the world economy on Czech exports, the Czech National Bank decided to keep the interest rates on hold at the start of 2019. Nevertheless, pro-inflationary factors are comparatively solid. Headline inflation in January had come in at 2.5 percent, while the core rate came in at 3 percent. Therefore, the Czech central bank might wait to see how economic development in the euro area continues and if it rebounds, interest rates would go upward, according to an Erste Group Research report.
“We expect the CNB to hike once this year (3Q), which we see as the baseline scenario of our forecast”, said Erste Group Research.
Nevertheless, this development is conditioned by a return of the koruna to an appreciating trend and economic rebound in the euro area. However, two hikes cannot be ruled out if the Czech koruna continues to be soft or even stability of rates if GDP growth in the euro area stays low.
“In 2020, we also expect one additional interest rate increase, due to less proinflationary effects stemming from the Czech labor market and appreciating koruna”, added Erste Group Research.
