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Czech Economic Outlook: Economy breathing but fitness is a long way off

Company: Komerční banka, a.s.

The Czech economy is expanding

The economy bottomed in 2Q but has now started to rebound. In the second quarter, the economic situation could be better than we had initially expected. However, for the coming quarters, we now expect a lower growth rate. All in all, the economy is likely return to pre-crisis levels by the end of 2021.  

The inflation to decelerate

We expect that weaker demand will decelerate consumer price increases. Fuel prices will stay lower and the growth rate of food prices will decelerate. We still expect inflation to remain below 2% in 2021.

CNB unlikely to change rates at its August meeting

It will probably continue to consider current monetary policy easing as sufficient. One reason for this is that inflation is above the upper edge of the tolerance band. This is also likely to postpone the debate on the possible introduction of unconventional measures. However, the outlook for the economy is still uncertain and inflation is likely to slow significantly in the coming months. In our view, interest rates will remain low until the end of 2021.

Financial markets are paving the way for further koruna strengthening

Positive sentiment in global markets and rising rates are pushing the koruna to higher valuations. In our opinion, this trend will continue in the coming months and especially next year. The second wave of the pandemic and CNB intervention on the FX market remain a risk.

CZGB yields are rebounding from the bottom

Despite a record increase in the state budget deficit, the supply of CZGB will be minimal for the rest of the year. Next year, however, it will be similar to this year. Demand is gradually declining after historically record months, but will still remain higher than supply. In conjunction with rising IRS, yields will continue to grow.

To see the Czech Economic Outlook report click here.

Tags: Economics | Finance |

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