Czech official inflation outlook revised up, early exit from koruna cap likely if inflation exceeds target in coming months

The Czech Republic’s government has increased its main macroeconomic forecasts on Monday in an updated quarterly assessment. The government revised up its GDP growth projection for 2017 to 2.6 percent from an earlier expectation of 2.4 percent, while for 2018 it rose the growth expectation to 2.6 percent from 2.5 percent.

Meanwhile, the Czech government also hiked its forecast for inflation for this year, but kept the projection unchanged for next year. The inflation outlook for 2017 has been increased to 2 percent, while for 2018 the outlook has been kept unchanged at 1.6 percent.

This shows a situation where commodity prices and base effects play a considerable role in inflation acceleration in 2017; however, these factors might wane next year, noted Commerzbank in a research report. This kind of projection is a bit different from the CNB’s projection that shows inflation stabilizing at 2 percent target level.

The difference underlines an important dilemma that CEE policymakers are expected to face in the future. Inflation rates are expected to accelerate to target levels in many cases; however, to what degree would this be sustained. If it is not able to be sustained, then there is no requirement for the central banks to withdraw monetary accommodation.

However, the CNB is disproportionately sensitive to higher inflation than it is to lower inflation, signifying that the risk of an early exit from the koruna cap would rise if inflation surpassed target steadily in months ahead, added Commerzbank.