Czech economic growth decelerating this year, inflation likely to meet target rate in H2 2017

Following the exceptionally strong economic growth in 2015, the pace of Czech economic growth is slowly decelerating in 2016, according to KBC Market Research. The demand side is being mainly driven upwards by household consumption and exports. On the contrary, investment activity has slowed considerably. In spite of a record-breaking employment and wage growth acceleration, inflation continues to be quite below the Czech National Bank’s target rate.

The current government is unlikely to carry out any considerably economic and political reforms or changes except the unified electronic records of sales. Similarly, the Czech Republic is not expected to take any steps to adopt the euro in the near future.

The inflation forecast still sees meeting the target rate in the second half of next year, thereby freeing the central bank from discontinuing its exchange rate system, with the CNB Board expecting the discontinuation in mid-2017. Meanwhile, the CNB projects considerable increase in short-term market rates as early as third quarter; however, this is quite unlikely, added KBC Market.

Furthermore, when timing the departure from its interventions and rate hikes, the central bank would also have to take the ECB policy into account to avert unnecessary triggering of excessive inflows of speculative capital.

Strong economic growth, combined with the rising current account surplus should result in long-term appreciation of the CZK after the exchange rate system is discontinued. At present, this signifies that koruna’s exchange rate would not considerably diverge from its intervention threshold until the time of exit. The Czech National Bank still considers the mid-2017 to be the most likely date for unleashing the koruna.

“However, we believe that the risks tend towards a postponement of this move”, noted KBC Research.