Inflation likely to reach double digits As we start 2022, consumer prices look set to rise rapidly again. We therefore expect annual inflation to peak at slightly above 10% in the first half of the year, before slowing significantly thereafter.

The CNB is likely to raise interest rates to 5% This peak should be reached in May. As strong inflationary pressures ease, however, we expect the central bank to start cutting rates towards the policy neutral 2.5% level from the end of 2022.

Yields are nearing their peak We expect the short end of the yield curve to increase in response to the CNB’s rate hikes, with a turnaround only in the second half of this year. The supply of bonds is likely to fall this year compared to last year, and their yields will thus remain below the IRS in an environment of persistently strong demand.

USD likely to prevent significant CZK appreciation While a record-wide interest-rate differential should push the koruna to stronger levels, we expect this to be countered by the US dollar, which we believe will strengthen further vs the euro. Overall, we expect the koruna to give back some of the gains from the beginning of this year, returning to EURCZK25 once the Fed starts its policy normalisation. We then expect the koruna to appreciate towards EURCZK24.80 by end-2022

Regards,

Jan Vejmělek,Jana Steckerová,Michal Brožka,Martin Gürtler,Jaromír Gec

Economic and Strategy Research

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