FINANCIAL MARKET INFLATION EXPECTATIONS - OCTOBER. Financial Market Department Operations Analyses Division

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1 FINANCIAL MARKET INFLATION EXPECTATIONS - OCTOBER Financial Market Department Operations Analyses Division 2017

2 I. SUMMARY 2 Fourteen domestic and two foreign analysts took part in the survey. The survey results reveal that although the forecasts for GDP growth, interest rates and, in particular, nominal wages were revised upwards, the view of the future price level is unchanged. The forecast for the koruna exchange rate reflected recent changes on the forex market and the CNB s rhetoric, and shifted to stronger levels. DOMESTIC ANALYSTS I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. J. Polanský, Česká spořitelna David Marek, Deloitte Czech Republic Jan Vejmělek, Komerční banka Patrik Rožumberský, Unicredit Global Research František Táborský, Helena Horská, Raiffeisenbank Petr Dufek, ČSOB Petr Sklenář, J&T Banka Radomír Jáč, Generali Investments CEE Jaromír Šindel, Citi Tomáš Holinka, Moody's Analytics Jan Kudláček, Tomáš Lébl, AXA Jakub Seidler, ING Lukáš Kovanda, Cyrrus Michal Šoltés, RoklenFin FOREIGN ANALYSTS Sara Grut, Goldman Sachs Emily Mansfield, The Economist Intelligence Unit Jose A. Cerveira, JP Morgan We would like to thank everyone who contributed to this survey of financial market inflation expectations. Prague,

3 3 II. INFLATION FORECAST FOR Y/Y CPI GROWTH (%) 1Y AND 3Y FORECAST FOR CPI GROWTH (%) ANALYSTS CNB (%) CPI Y 3Y 1Y 3Y 1Y minimum Q: 2, maximum Q: 2, Q: 2, Q: 2, Q: 2,0 Despite the year-on-year increase in inflation to 2.7% in September, the analysts forecast was unchanged from the previous survey. It stayed at 2.2% at the one-year horizon and remained anchored at the CNB s 2% target at the three-year horizon. The range of the estimates narrowed at both monitored horizons due to an increase in the minimum value. A substantially larger change in the minimum value was recorded for the three-year forecasts. Inflation is still being driven by domestic demand, labour market tightness, food prices and on the back of an economic improvement in the euro area and higher oil prices factors from abroad. According to the analysts, the Czech economy is beginning to overheat. This will cause inflation to stay above the inflation target in the course of next year amid gradual monetary policy tightening and appreciation of the koruna. The opinion was expressed that if monetary policy is not tightened, inflation could attack the upper boundary of the tolerance band around the inflation target during CPI: ACTUAL DATA AND 1Y PREDICTIONS OF ANALYSTS (AVERAGE) AND OF CNB (%) CPI AT 1Y: PREDICTIONS OF INDIVIDUAL ANALYSTS range CNB ANALYSTS

4 III. GROSS DOMESTIC PRODUCT 4 FORECAST FOR GDP GROWTH (%) FORECAST FOR GDP GROWTH (%) end of year end of year 2017 current current+1y current current+1y minimum maximum The CZSO s final estimate confirmed that the Czech economy is experiencing an exceptionally strong boom. It grew by 4.7% in 2017 Q2, in line with the previous revised estimate. The analysts views recorded no major change from September. According to the forecast, GDP will grow by 4.2% this year, up by 0.1 pp on a month earlier. Next year, by contrast, the economy is expected to slow to 3.1%, i.e. the same level as expected in the previous survey. The range of the forecasts for 2017 narrowed due to an increase in the minimum value, while the extremes of the outlook for next year increased in parallel and their range therefore remained the same. Czech economic growth is being driven chiefly by domestic demand, which is currently being strongly supported by household consumption and high growth in nominal wages. However, the analysts are also encouraged by the contribution of external demand to the performance of the Czech economy this year. From the supply-side perspective, the analysts were pleasantly surprised by the August statistics from Czech industry, which they view as heralding one of the highest whole-year growth rates in recent years. GDP GROWTH IN CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS

5 5 IV. INTEREST RATES FORECAST FOR 2W REPO, 12M PRIBOR AND 5Y AND 10Y IRS (%) 2W repo rate 12M PRIBOR 5Y IRS 10Y IRS 1M 1Y 1M 1Y 1M 1Y 1M 1Y FORECASTS: MINIMUM, AVERAGE AND MAXIMUM 2W REPO, 12M PRIBOR, 5Y AND 10Y IRS (%) 2W repo rate 12M PRIBOR 5Y IRS 10Y IRS M 1Y 1M 1Y 1M 1Y 1M 1Y minimum maximum ACTUAL INDICATOR VALUES AS OF FORECAST DEADLINE (%) 2W 12M 5Y 10Y repo rate PRIBOR IRS IRS The very favourable economic developments and the CNB s communications are strengthening the analysts view that Czech monetary policy will soon be tightened further. All the respondents expect the two-week repo rate to be raised by 0.25 pp to 0.50% at the November Bank Board meeting. The one-year forecast is also markedly higher. It rose by 21 bp to 1.08%. As the table below shows, most of the estimates for November 2018 are now between 1.00% and 1.25%. One respondent even predicts an increase to 1.50%. ANALYSTS FORECAST - 2W REPO RATE LEVEL IN 1Y (%) 2W repo rate level in 1Y (%) number of analysts The prospect of higher policy rates is also reflected in the expected path of the reference and market interest rates. The forecasts for PRIBOR and IRS rates increased by bp, with larger shifts being recorded at the one-year horizon.

6 IV. INTEREST RATES 6 12M PRIBOR AT 1Y : ACTUAL DATA, AVERAGE AND RANGE OF PREDICTIONS % W REPO AND 12M PRIBOR: 1Y PREDICTIONS OF INDIVIDUAL ANALYSTS ANALYSTS 12M PRIBOR 2W REPO 5Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS

7 7 V. EXCHANGE RATE 1M AND 1Y EXCHANGE RATE FORECAST EXCHANGE RATE FORECAST EUR/CZK EUR/CZK 1M 1Y M 1Y minimum maximum ACTUAL EUR/CZK AS OF FORECAST DEADLINE The koruna appreciated markedly compared to the previous survey, attacking CZK 25.8 to the euro on the survey cut-off date ( ). The analysts forecasts reacted to the appreciation of the koruna on the forex market. They expect the koruna to be around CZK 25.8 to the euro one month ahead and close to CZK 25.2 to the euro one year ahead. According to the analysts, the appreciating koruna reflects strengthening market confidence in an early policy rate hike, based largely on remarks made by individual CNB representatives. Given the appreciation scenario, the koruna is expected to keep appreciating in the long run. This changes nothing about the fact that it remains vulnerable due to the accumulated speculative position. EUR/CZK: ACTUAL DATA, 1Y PREDICTIONS AND THEIR RANGE 3 EUR/CZK AT 1Y: PREDICTIONS OF INDIVIDUAL ANALYSTS prediction ANALYSTS

8 VI. WAGES 8 FORECAST FOR NOMINAL WAGE GROWTH (%) FORECAST FOR NOMINAL WAGE GROWTH (%) year end year end 2017 current current+1y current current+1y minimum maximum Insufficient supply on the labour market is being reflected in rapid wage growth. This is confirmed by the latest data from industry, where the gross nominal monthly wage rose by 7.5% year on year in August. Some of the analysts believe that the whole-economy wage rose at a similar pace in 2017 Q3. The forecast for this year in our survey rose by 0.1 pp compared to the previous survey round, reaching 6.6%. The unemployment rate is now extremely low, giving employees substantial wage bargaining power, so the analysts do not expect wage growth to slow markedly. Moreover, the government sector is also recording significant wage growth. The forecast for next year therefore saw an even larger upward shift, rising by 0.3 pp to 6.2%. WAGE GROWTH - END OF CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS (%) prediction