Manufacturing industry has primarily helped accelerate Czech economic growth substantially. Most of the economy’s sectors are indicating a positive trend. On the demand side, private and public sector investment are becoming strong stimulus driven by rising real wages and employment. Currently, fundamental economic changes or reforms are unlikely to take place.
The latest projections do not show inflation converging the target rate before the start of 2017, with inflation not considerably diverging from it later either. The Czech National Bank has extended its exchange rate commitment until the first half of 2017. There is a possibility of the central bank to introduce negative interest rates in the wake of broadening interest rate differential vis-à-vis the euro area and developments in domestic financial markets.
However, the CNB is unlikely to introduce negative rates as there are two preconditions required for negative official rates; that are considerable rate cut by the ECB and continuing large monthly FX interventions of the Czech National Bank, said KBC Market Research in a research report.
Meanwhile, capital account surpluses, robust economic growth and the continuing QE in the euro area have been mainly responsible for the recent appreciation of CZK. The FX regime is expected to end in the first quarter of 2017 with regard to the ECB’s policy and inflation outlook. The factors mentioned above are expected to, however, keep the EUR/CZK close to 27 in the coming months, added KBC Market Research. The Central Europe region faces negative risks from the China’s market turmoil. However, the effect on koruna is expected to be limited.
