The Czech koruna is floating again. From the perspective of the Czech economy’s expected growth, this does not mean anything important. However, things are different from the perspective of the inflationary development and monetary policy. Inflation will stay above the CNB’s target this and next year. If the crown does not significantly strengthen to less than CZK 26/EUR, we may see the CNB hiking its interest rates this year.
We forecast overall economic growth of 2.7% in 2017, which is our estimate for 2018 as well. Household consumption will retain its role of the most stable contributor to GDP growth.
Inflation is set to rise to 2.3% on average this year, and we expect it to maintain this pace in 2018 on the back of growth of core prices due to a widening output gap.
We expect that the domestic inflationary pressures will imply only one hike this year given the approximately 3% expected appreciation of the koruna versus the euro.
Fundamentally, the Czech economy is poised for a stronger koruna. However, the massive speculative position is limiting room for a quick appreciation of the domestic currency and constitutes a risk of temporary but significant depreciation.
CZGB yields are set to gradually increase in 2017, but this trend should be mitigated by the expected pre-election drop in supply and the year-end effect of the Resolution fund.