Measuring financial market inflation expectations Results of the 107th Measurement (March 2008) Nine domestic and two foreign analysts sent in their predictions for inflation and other indicators to the CNB s March survey. Compared to the February survey, the analysts further decreased their inflation forecast at the one-year horizon due to the expected unwinding of one-off inflation factors and expected lower depreciation of the koruna. The estimate of GDP growth this year remained broadly unchanged. Compared to 2007, however, there will be a significant weakening as a result of lower household consumption due to higher inflation and the public finance reform and an expected cooling in the euro area. Short-term interest rates increased slightly. The analysts estimate both stability of monetary policy rates and movements in both directions at the one-year horizon. The continuing deviation of the koruna from its equilibrium appreciation trend is resulting in greater uncertainty regarding future developments. 1. Inflation CPI for za 11R: year: průměr average prognózy and range a rozpětí of the prognózy annual CPI (%) 1 year 3 years min. average 3.2 2.6 max. 4.1 prognóza CPI forecast CPI 37561 XI-02 I-05 37742 V-03 VII-05 37926 XI-03I-06 38108 V-04VII-06 XI-04 38292 I-07 V-05 38473 VII-07 XI-05 38657 V-06 38841 I-08 average průměr range range of rozpětí of the the prognózy The inflation forecast at the one-year horizon declined further in March, from 3.4% in February to 3.2% year on year, while the forecast at the three-year horizon remained at 2.6% year on year. The analysts thus seem to believe that the present strong price growth due to a combination of several factors is only a one-off and should subside gradually at the one-year horizon. According to the analysts, the month-on-month decrease in the inflation forecast is due either to an expected cooling of growth in the euro area and the Czech Republic or to a stronger koruna. Administrative changes (to rents and energy prices) will still be the main inflation factors. Compared to February, there is slightly greater forecast uncertainty among the domestic analysts. The range of the inflation at the one-year horizon increased from to 1.6 percentage points, due to a lower minimum estimate (see the chart) 1. Nevertheless, one of the analysts emphasises the upside risks to inflation resulting from the pass-through of the high inflation into inflation expectations and a possible depreciation of the koruna in 2008 H1. CPI - actual data + predictions of analysts (avg.) for 1 year annual CPI ČNB Prediction for 1 Y 3 Y 1 Y % % % III-07 3.2 3.3 IV-07 3.1 VII-07 3.1 4.2 X-07 4.3 4.9 XII-07 2.7 5.1 I-08 3.7 2.8 3.6 II-08 3.4 2.6 3.4 3.2 2.6 3.1 1 The difference between the maximum and minimum estimate of the domestic analysts in this survey, due to a more stable data base. 7.0 6.0 VI VI actual data Č NB forecas t analysts (avg.)
2. Gross domestic product GDP growth in current year next year min 3.7 3.6 average 4.6 4.7 max 5.5 GDP growth in Prediction for current year next year III-07 % 4.8 4.6 IV-07 4.8 4.7 VII-07 5.6 4.9 X-07 5.8 4.7 XII-07 6.0 4.7 I-08 4.7 4.8 II-08 4.9 4.6 4.7 prognóza GDP HDP GDP Růst GDP growth HDP growth ke at konci in the the end stávajícího current of this year: roku: average průměr and a rozpětí range 7.0 6.00 2005 2006 2007 6.0 5.50 40 30 20 10 0.5 0 I-04 I-04 I-05 VII-05 VII-04 I-06I-05 VII-06 VII-05 I-07 VII-07 I-06 I-08 VII-06 average průměr range rozpětí of of the the prognózy In March, the analysts slightly increased their GDP growth forecast for 2008, from % to 4.6% year on year. They expect similar growth next year as well. Compared to 2007, however, GDP growth has been lowered significantly over concerns of a cooling of the euro area economy (= lower domestic exports) and domestic consumer demand, due to lower real wage growth, lower credit expansion and the government fiscal reform. By contrast, investment could grow somewhat faster this year thanks to stronger inflows from EU funds and to FDI inflows into the automobile sector in particular. A slight pick-up in GDP growth in 2009 (following an expected decline this year) should be brought about by a renewed increase in the trade surplus, chiefly thanks to the launch of production at the Hyundai car factory. The range of the GDP growth estimates for 2008 was unchanged. The extent of the slowdown of the U.S. economy and the effect on the euro area economy are the main sources of uncertainty. 3. Interest rates 2W repo rate (%) 12M PRIBOR (%) 5Y IRS (%) 10Y IRS (%) 1 month 1 year 1 month 1 year 1 month 1 year 1 month 1 year min. 3.75 0 0 3.40 4.10 0 4.30 4.20 average 3.82 3.75 9 3.98 4.15 4.26 4.44 0 max. 0 4.25 4.30 4.40 4.30 0 4.60 4.70 Expected short-term rates rose slightly, owing to the persisting high inflation. Three of the eleven analysts expect the CNB to raise its 2W repo rate by a further 25 basis points to 0% at its March monetary policy meeting. Although the analysts expect a decline in inflation at the one-year horizon, its current level coupled with the risk of a koruna depreciation might result in yet another increase in rates. At the longer horizon, however, the analysts vary in their estimates. Four analysts expect interest rate stability at the oneyear horizon, while five analysts expect a decline as far as 0% and the remaining two expect an increase (one of them as far as 4.25%). The range of the for the repo rate at the one-year horizon widened, owing to an increase in the maximum estimate (to 4.25%). The range of the for the 12-month PRIBOR widened, too. Spillover of the high prices into inflation expectations, the possible depreciation of the koruna and the lowering of the CNB s inflation target remain upside risks to rates. An appreciation of the koruna and a sizeable cooling of economic growth in the euro area are downside risks. The expected slope of the money market yield curve at the one-year horizon as measured by the 12M PRIBOR minus the 2W repo rate rose by 7 basis points compared to February, to 23 basis points, owing to faster growth in one-year rates.
The forecast for long-term yields at the one-year horizon remained virtually unchanged. Yields will be affected by the situation on foreign markets. If the crisis in the financial markets and the U.S. recession deepen further, yields will decrease further. Other possible reasons for lower yields include low net issuance of domestic bonds this year (the Ministry of Finance is theoretically considering a eurobond issue, which would further considerably reduce the supply of government bonds) and a lower budget deficit in 2008 than the initially planned figure of about CZK 70 billion. By contrast, only a slight cooling in the USA would lead to a rise in yields. The range of the for 5Y and 10Y yields at the one-year horizon remained stable compared to February. 2W repo rate 12M PRIBOR 5Y IRS 10Y IRS Prediction for 1 M 1 Y 1 M 1 Y 1 M 1 Y 1 M 1 Y % % % % III-07 0 6 2.81 3.36 3.45 3.99 3.83 4.19 IV-07 0 3.10 2.87 3.42 6 3.94 3.95 4.25 VII-07 0 6 3 3.92 4.32 1 4.60 4.74 X-07 3.33 3.83 3.85 9 4.21 4.42 1 4.64 XII-07 4 3.83 9 9 4.27 4.38 2 4.66 I-08 3.75 3.89 4.19 4.10 4.31 4.37 5 4.62 II-08 3.75 3.75 3.98 3.91 9 4.26 4.43 4.48 3.82 3.75 9 3.98 4.15 4.26 4.44 0 Actual values of indicators on the day of deadline for 2W repo rate 12M PRIBOR 5Y IRS 10Y IRS 12.3. 3.75% 4.21% 4.24% 4.49% 12M PRIBOR - analysts' predictions for 1 year (avg.) and actual data (avg.) 5Y IRS 5R for IRS 1 year: za 1R: average průměr and a rozpětí range prognózy of the VI actual data VI predictions - 1 year prognóza 5Y IRS forecast 5R IRS XI-02 I-05 V-03 VII-05 XI-03 I-06 V-04VII-06 XI-04 I-07 V-05 VII-07 XI-05 I-08 V-06 average průměr average rozpětí range of prognózy of the the 4. The exchange rate CZK/EUR EUR/CZK CZK/EUR for 1 year: za 1R: average průměr and a rozpětí range of prognóz the 33 30 1.6 EUR/CZK 1 month 1 year min. 24.90 20 average 25.34 25.48 max. 25.60 26.30 Actual exchange rate 12.3. 265 prognóza CZK/EUR EUR/CZK kurzu forecast CZK/EUR 32 29.00 31 30 28.00 29 28 27.00 27 26.00 26 20 XI-02I-05 V-03VII-05 XI-03 I-06 V-04 VII-06 XI-04 I-07 V-05 VII-07 XI-05 V-06 I-08 1.4 1.6 1.2 1.2 0.8 0.6 0.8 0.4 0.4 0.2 average průměr average range of the
The analysts expect the koruna to depreciate, but not as significantly as they expected in February. The koruna is expected to depreciate to 25.50 EUR/CZK at the one-year horizon, which is CZK 0.50 less than a month ago. According to the analysts, the lower expected depreciation of the koruna is probably due to the deteriorating prospects for the U.S. economy and thus to the expected long-running interest in the koruna as a safe haven. However, they say that the current appreciation of the koruna does not reflect domestic economic fundamentals and is deviating from the equilibrium appreciation trend. The koruna should depreciate as soon as signs of a stabilisation and recovery of the U.S. economy become evident and investors return to the dollar, say the analysts. If, however, the U.S. recession is deep and protracted, the Fed makes a further pronounced rate reduction and the interest rate differential widens in favour of the koruna, the return to the equilibrium level might be slower. An outflow of dividends will also act against the koruna in the short term. exchange rate Prediction for 1 month 1 year EUR/CZK III-07 28.12 27.24 IV-07 27.99 27.16 VII-07 28.41 27.39 X-07 27.49 26.93 XII-07 26.39 26.19 I-08 26.05 25.84 II-08 25.98 26.01 25.34 25.48 30 30 30 29.00 28.00 27.00 VI 26.00 20 EUR/CZK - analysts' predictions for 1 year (avg.) and actual data (avg.) actual data VI predictions - 1 year The range of the domestic analysts estimates widened slightly further compared to the February survey (see the chart), due to a faster shift to a more appreciated koruna. The greater the deviation of the current exchange rate from its long-term equilibrium trend, the greater the uncertainty regarding future developments. The foreign analyst who expected the koruna to depreciate to 28 EUR/CZK at the one-year horizon in the February survey did not provide a koruna exchange rate forecast in March. The risks of a weaker/stronger koruna compared to the average forecast are derived from the depth and length of the recession in the USA and the interest in dollar assets. 5. Wages Wage growth in current year next year min 7.5 7.0 average 8.3 7.8 max 9.3 8.7 wage growth in Prediction for current year next year III-07 % 6.6 6.5 IV-07 6.7 6.5 VII-07 7.5 7.1 X-07 7.5 7.5 XII-07 7.6 7.9 I-08 8.1 7.6 II-08 8.0 7.4 8.3 7.8 In March, after a one-month pause, the analysts again increased their forecast for nominal wage growth in 2008, from 8.0% to 8.3% year on year. The forecast for wage growth in 2009 rose even more significantly, from 7.4% to 7.8% year on year. The expected slight rise in wages is due to the still strong GDP growth, persisting low unemployment and concerns that trade unions will open the issue of wage increases this year. One of the analysts made a distinction between the forecast for wage growth in the business sector (9.0% year on year in both 2008 and 2009) and that in the non-business sector (4.2% and 7.5% year on year in 2008 and 2009 respectively).
We would like to thank the following respondents for their contributions to this survey of financial market inflation expectations: Martin Lobotka from Ceska sporitelna David Marek from Patria Finance Jan Vejmelek from Komercni banka Pavel Sobisek from Unicredit Global Research Helena Horska from Raiffeisenbank Petr Dufek from ČSOB Petr Sklenar from Atlantik financni trhy Radomir Jac from PPF Asset Management Vojtech Benda from ING Wholesale Banking Leila Butt from The Economist Intelligence Unit and Miroslav Plojhar form JP Morgan. Special thanks go to the analytical teams at Ceska sporitelna and The Economist Intelligence Unit for their comments on the.