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

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

2 I. SUMMARY 2 Thirteen domestic and three foreign analysts took part in the survey. The survey results indicate slightly faster growth in the one-year inflation forecast. By contrast, the expected growth rate of the Czech economy this year was lowered. The outlook for the 2W repo rate has shifted markedly higher. In addition to persisting inflation pressures, the analysts justify the shift by a weaker exchange rate of the koruna. The short-term forecast for the koruna reflects the recent correction on the foreign exchange market. In the longer time horizon, the analysts still stick to an appreciation scenario. Continued labour market overheating led to a moderate increase in the expected rate of wage growth in both horizons monitored. 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, Kamil Kovář, 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 (%) CPI ANALYSTS CNB (%) Y 3Y 1Y 3Y 1Y minimum Q: Q: 2.2 maximum Q: Q: 1, Inflation in the Czech Republic slowed after three months of acceleration, due mainly to a drop in food prices. The consumer price index rose by 2.3% year on year in July, whereas in June its growth had reached 2.6%. By contrast, the analysts oneyear forecast moved in the opposite direction. The analysts probably reflected the faster annual growth in the price level in June with a lag. At the three-year horizon, the forecast is unchanged and remains at the CNB s 2% inflation target. The range of the individual forecasts widened, due to a faster increase in the maximum value of the one-year forecasts and a drop in the minimum value of the three-year forecasts. Despite the slower growth in the price level in July, the analysts remain convinced that the current labour market situation is creating inflation pressures through growth in firms wage costs. Although this effect is being dampened by higher labour productivity (firms are forced to invest in automation, which leads to growth in labour productivity and generates a positive supply shock), employers will gradually have to incorporate the high wage costs in the prices of their products. One of the most important factors which will, according to some of the analysts, affect inflation in the short term is the exchange rate of the koruna. However, slowing inflation will accelerate again at least at the start of next year due to expected growth in energy prices. 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 growth of the Czech economy slowed even more, as GDP rose by 2.3% year on year in 2018 Q2 according to the CZSO. This was subsequently reflected in the analysts forecast for this year, which fell from 3.4% in June to the current 3.1%. The opinion about the domestic economy next year remains unchanged and the forecast thus remains at 3.0%. The range of the forecasts has narrowed since the last survey, due to a larger drop in the maximum value in the forecasts for this year and an increase in the minimum value in the forecasts for next year. The analysts have observed a slowdown in the growth of the domestic economy since the middle of last year, as well as its lagging behind the growth of the economies in the region, specifically Hungary and Poland. According to the analysts, this is due largely to a shortage of labour and capacity constraints, with labour productivity, whose growth is necessary for a continued sustained economic recovery at the moment, showing relatively low growth despite strong investment activity in the private sector. As regards expenditure components, GDP growth is still expected to be driven the most by household consumption and firms investment activity. According to the analysts, the economic recovery in Germany could give a major growth impulse to the Czech economy, while tightening monetary conditions in both the exchange rate and interest rate components will have the opposite effect. 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 analysts believe that the CNB has not yet fully exhausted the room for increasing key interest rates. Seven of them expect the CNB Bank Board to raise the 2W repo rate by 25 bp at the next (September) meeting, while nine respondents expect the key rates to be left unchanged at their current levels. However, this should not by far end monetary policy tightening as the analysts predict the 2W repo rate at between 1.75% and 2.25% at the one-year horizon (see table below), which is a much higher level than in the previous survey. ANALYSTS FORECAST - 2W REPO RATE LEVEL IN 1Y (%) 2W repo rate level in 1Y (%) number of analysts - current survey previous survey The forecasts of the future path of PRIBOR reference rates and swap rates again reflect the change in key interest rates at the CNB s meeting, at which the 2W repo rate was increased by 25 bp. The 12M PRIBOR reference rates thus shifted upwards by17 bp for the one-month forecast and 24 bp for the one-year forecast. The 5Y and 10Y swap rates recorded smaller movements (between 11 and 19 bp).

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

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 has appreciated against the euro since the middle of July. The analysts reflected this in their short-term forecasts and expect it to hover around CZK to the euro on in the middle of September. By contrast, slightly slower appreciation is expected at the one-year horizon and the koruna should thus stand close to CZK to the euro in next year. The koruna has strengthened since the last survey, but the analysts now see it as more vulnerable to external shocks and less sensitive to domestic fundamentals as unfavourable external conditions outweighed the effect of a positive interest rate differential. According to some of the analysts, this vulnerability is also fostered by overboughtness of the koruna persisting from the time when the CNB s exchange rate commitment was in place. However, the growing interest rate differential, together with fading global uncertainty, should gradually encourage a portfolio investment inflow and the koruna should, in the analysts view, continue to follow an appreciation trend, although at a weaker level than the analysts expected in spring this year. EUR/CZK: ACTUAL DATA, 1Y PREDICTIONS AND THEIR RANGE 28.0 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 Labour market tightness is not easing despite slower economic growth. However, the unemployment rate is not decreasing further despite the overheating labour market. According to some of the analysts, this is because it is already extremely low and there is little room for it to drop further. Moreover, the number of vacancies continues to rise, which is clearly signalling that demand for labour remains high. Labour market overheating combined with fast wage growth in the public sector probably led the analysts to raise the expected rate of wage growth in both monitored years by 0.1 pp, to 7.9% this year and 5.8% next year. WAGE GROWTH - END OF CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS (%) prediction