Czech National Bank likely to tighten policy further by 25-50 basis points

One of Czech National Bank’s main hawk, Vojtech Benda, stated that the fourth quarter wage data would be important in indicating the direction in which the central bank’s projections might have to be revised in the next Inflation Report.

The February Inflation Report had stated that the wage growth is expected to be solid initially during 2018, but productivity gains are likely to ease towards 5 percent in the medium-term. Benda highlighted that the fourth quarter data might throw light on whether this was still a valid assumption or whether the labor market was overheating more than expected.

However, he qualified that room for such tightening might be restricted in the near-term by the ECB’s negative depo rate and continuing asset purchases. In other words, if wage growth were to accelerate towards 7 percent in quarters ahead, CNB might look to tighten policy further, but probably not by more than 25 basis points or 50 basis points in the period that the ECB is still purchasing assets, noted Commerzbank in a research report.

“Our own view on this matter is that recent inflation data, from the Czech Republic and from euro zone, have surprised by their softness despite strong wage growth; only if wage growth were strong enough to challenge that reality would it act as a trigger for koruna appreciation – otherwise, within normal range, the market will probably assume that wage growth and inflation can diverge some more”, added Commerzbank.

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