The Czech Republic economic growth has begun slowing moderately due to the exports and household consumption. Inflation in the country continues to be weak despite the expected strong GDP rate. Moreover, inflation is not expected to meet the Czech National Bank’s inflation target before 2017, thereby enabling the CNB to carry on with exchange rate policy.
Currently, any fundamental economic alterations or reforms are not expected, except for the removal of the pension reform and the introduction of the electronic registration of sales, noted KBC Market Research in a research report. Moreover, in this electoral term, progress in Czech’s preparations for joining the euro area is not expected either.
The recent projection does not foresee inflation returning to the target rate before early 2017. It is not expected to significantly diverge from the target after reaching the target either, said KBC Market Research.
The Czech National Bank has extended its exchange rate commitment until the first half of next year. The likelihood of bringing negative interest rates have been rising, following the broadening of the interest rate differential vis-à-vis the euro area and developments in domestic financial markets, according to KBC Market Research.
But the central bank is still unlikely to introduce negative rates. There are two preconditions to introduce negative rates: firstly considerable rate cut by the ECB, and secondly continuing large monthly FX interventions of the Czech National Bank.
Meanwhile, the koruna has appreciated recently owing to the solid economic growth, current and capital account surpluses and the current QE in the euro area. Given the inflation outlook and the European Central Bank’s policy, the CNB is expected to exit from the FX regime in the first quarter of next year. However, the factors mentioned above should keep EUR/CZK at around 27 in the coming months, stated KBC Market Research.
