The Czech economy should moderately accelerate this year to 2.7%. Domestic consumption will continue to support growth but we also expect a modest increase in investment.
Inflation is likely to overshoot the CNB’s target through 2017, to average at 2.2%. At the beginning of the year, the base effect in fuel and food prices will push inflation up, while over the rest of the year, the core element will be the main driver.
CNB will scrap the FX floor in the second quarter of this year in our view. We believe that the regular May meeting will provide the right opportunity. The risk is that an extraordinary meeting could be held in April. We have dropped our negative rates call, although this remains our risk scenario.
Exit from the FX floor will result in increased exchange rate volatility; in the event of extreme swings, CNB could intervene on both sides. The return to the long-term CZK appreciation trend will be gradual.
Short-end CZGB yields are set to remain deeply negative until the end of the FX floor. Thereafter, the short end should move back towards zero. Long-end yields are set to gradually increase over the course of 2017.
More information in the attached newest issue of our quarterly report Czech Economic Outlook.