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

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1 2018 FINANCIAL MARKET INFLATION EXPECTATIONS - MARCH Financial Market Department Operations Analyses Division

2 I. SUMMARY 2 Fourteen domestic and three foreign analysts took part in the survey. The results suggest that the inflation forecast is unchanged despite higher expected growth in nominal wages. All the respondents expect the 2W repo rate to be left at its current level at the CNB Bank Board s meeting. The GDP growth estimate recorded only slight changes and returned to the levels of the January survey. The outlook for the nominal koruna-euro exchange rate is also virtually unchanged. DOMESTIC ANALYSTS I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. J. Polanský, Česká spořitelna David Marek, Deloitte Czech Republic Viktor Zeisel, Marek Dřímal, 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 + + Martin Janíčko, Moody's Analytics Jan Kudláček, Tomáš Lébl, AXA Jakub Seidler, ING Lukáš Kovanda, Cyrrus Michal Šoltés, RoklenFin FOREIGN ANALYSTS Kevin Daly, Yanrong Tan, 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: Q: 2.1 maximum Q: Q: Q: According to the CZSO, the annual rate of consumer price inflation slowed surprisingly to 1.8% in February, a drop of 0.4 pp from a month earlier. However, this had virtually no impact on the forecast in our survey, which remains at 2.1% at the oneyear horizon and at the CNB s 2% inflation target at the three-year horizon. The range of the forecasts widened slightly at the one-year horizon due to a decrease in the minimum value. By contrast, it narrowed slightly at the three-year horizon due to an increase in the minimum value. According to some analysts, the slowdown in inflation has bottomed out and consumer price growth could accelerate slightly again in the months ahead. The analysts consider persisting labour market overheating and related dynamic wage growth as the main upside risks to inflation. However, inflation pressures are being reduced by a continued high base effect and by large amounts of investment, which are raising labour productivity. CPI: ACTUAL DATA AND 1Y PREDICTIONS OF ANALYSTS (AVERAGE) AND OF CNB (%) 3.5 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 2018 current current+1y current current+1y minimum maximum The analysts view of economic growth in 2018 and 2019 recorded only slight changes and the forecast returned to the levels of the January survey. Czech GDP is thus expected to record annual growth of 3.4% this year and 2.9% next year. The range of the forecasts for this year narrowed due to a decline in the maximum value, while the range of the forecasts for next year widened due to movements in both extreme values. In light of the tightening monetary conditions in both the exchange rate and interest rate components, the analysts expect Czech economic growth to slow this year. However, this slowdown is largely seen as positive, as the economy is currently hitting its production capacity limits. Economic growth is thus expected to return to its potential. However, potential output could increase in the future due to productivity growth stemming from higher investment. This would also support convergence of the Czech economy towards Western European countries. 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 Unlike in the previous survey, when one of the respondents had predicted an increase in rates at the CNB Bank Board s meeting, all the analysts this time expect the 2W repo rate to stay at the current 0.75% level until at least May. However, a monetary policy tightening should occur at the one-year horizon. As the table below suggests, most of the analysts expect the 2W repo rate to rise by 50 bp over the next 12 months. Only one analyst now expects a rise of 100 bp (as against two in the previous survey). Overall, this suggests expectations of a slightly slower pace of monetary policy tightening by the CNB. ANALYSTS FORECAST - 2W REPO RATE LEVEL IN 1Y (%) 2W repo rate level in 1Y (%) number of analysts - current survey previous survey The forecast for the PRIBOR interbank reference rate (12M) was little changed at the one-month horizon but slightly lower at the one-year horizon. This is in line with the above expectations of a slightly slower monetary policy tightening by the CNB. The drop in the forecasts for swap rates largely reflects changes in the corresponding rates on the derivatives market since the February survey.

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 12M PRIBOR 2W REPO ANALYSTS 5Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS 0.0

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 exchange rate depreciated modestly again, although only negligibly. The analysts forecast also recorded only minimal changes, which are imperceptible if rounded to one decimal place. According to the analysts, the koruna will thus be fluctuating around CZK 25.3 to the euro in mid-april and close to CZK 24.7 to the euro in next year. The analysts agree that the koruna exchange rate should continue to follow a gradual appreciation trend. The reasons remain the same: favourable economic developments and interest rate hikes by the CNB. Some of the analysts believe that foreign investors, who will gradually close the koruna positions they built while the CNB s exchange rate commitment was in place, could act in the opposite direction. Nevertheless, the behaviour of foreign investors is considered to be highly unpredictable. EUR/CZK: ACTUAL DATA, 1Y PREDICTIONS AND THEIR RANGE 30.0 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 2018 current current+1y current current+1y minimum maximum According to CZSO figures, the nominal wage increased by 8.0% year on year in 2017 Q4 and exceeded CZK 30,000. Wage growth amounted to 7.0% in 2017 as a whole. The analysts also raised their estimates, probably in light of the above data. They now expect nominal wage growth of 7.1% this year, 0.2 pp higher than they were predicting a month ago. The growth expected for 2019 increased to 5.2%, which is also 0.2 pp higher than in the February survey. The high nominal wage growth confirms persisting tightness and supply shortages on the labour market. Recruitment of foreign workers can reduce the excess demand only minimally. Labour shortages subsequently represent a constraint on Czech economic growth. However, some of the analysts believe that the current relatively high wage growth does not pose such a high upside risk to inflation as might seem at first glance, as it is covered by productivity growth. WAGE GROWTH - END OF CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS (%) prediction