Economic policy
This section reports on economic policy initiatives of the Czech government, the EU, and other entities that have a direct impact on the competitiveness of the country. It also includes information on economic priorities of the AmCham and other leading associations.
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Spotlight issue
The CNB surprised with a 75bp rate hike
The central bank raised its key repo rate by 75bp at its September meeting, whereas the market expected a 50bp hike. The strong rate increase is primarily a response to rising inflation, which is already reflected in higher inflation expectations. According to our forecast, inflation will continue to rise for the rest of the year, exceeding 5% yoy at its end. Therefore, we expect a repo rate of 2.00% at end-2021 and a further increase to 2.50% at end-2022. This is close to the level that the central bank considers to be monetary policy neutral.
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Czech economic rebound in 2Q supported by rapid easing of COVID restrictions
The third and final CZSO estimate published today confirmed that Czech GDP increased 1.0% qoq in 2Q after a 0.4% decline in 1Q. In year-on-year terms, the economy grew 8.1% (the previous estimate was 8.2% yoy), with a significant effect of a lower base from 2Q20. Economic activity almost reached pre-crisis levels, hitting 95% of the level seen in 4Q19.
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Elevated inflation to accelerate pace of monetary policy tightening
Inflation has accelerated markedly in recent months, reaching 4.1% yoy in August. Core inflation increased to a historical high of 4.8% yoy, with widespread price increases, especially in services. At the end of the year, we expect headline inflation to be close to 5.4%, but even higher value is a risk. In our view, this will force the central bank to raise interest rates faster. At the next bank board meeting on 30 September, we expect rates to be raised by 50bp. Monetary policy tightening should continue over the rest of the year, with the repo rate reaching 2% at year-end, from the current 0.75%. However, high inflation will dampen the impact of higher nominal rates, as real interest rates are likely to remain deeply negative.
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