FINANCIAL MARKET INFLATION EXPECTATIONS - DECEMBER Financial Market Department Operations Analyses Division 2018
I. SUMMARY 2 Thirteen domestic and three foreign analysts took part in the final survey this year. The results reveal that the general view of future inflation and interest rates was little changed. On the other hand, economic growth is expected to be slightly lower this year and the next. Slower growth in swap rates and appreciation of the koruna are expected, too. Conversely, nominal wages are expected to increase more next year than indicated in the previous survey. 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, Czech Fund + + + + + + + + + + + + Michal Šoltés, RoklenFin + + + + + + + + + + + + FOREIGN ANALYSTS Timon Dreyer, Kevin Daly, 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, 19 2018
3 II. INFLATION FORECAST FOR Y/Y CPI GROWTH (%) 1Y AND 3Y FORECAST FOR CPI GROWTH (%) CPI ANALYSTS CNB (%) 2018 1Y 3Y 1Y 3Y 1Y minimum 1.8 1.6 12.17 2.1 4Q: 2.2 2.2 1.18 2.1 1.9 1Q: 1.9 maximum 2.6 2.3 4.18 2.1 0.0 6.18 2.1 2Q: 1,7 9.18 2.1 3Q: 2,1 10.18 2.1 0.0 11.18 2.2 4Q: 2.2 12.18 2.2 0.0 The annual consumer price inflation index slowed from 2.2% to % in November, but the analysts forecast is unchanged, remaining at 2.2% at the one-year horizon and at the CNB s 2% inflation target at the three-year horizon. The range of the estimates was unchanged at the one-year horizon, while widening at the three-year horizon owing to a decrease in the minimum value. The November inflation slowdown was due largely to food prices. Owing to a weaker harvest this year, however, they are not expected to continue falling for much longer and, on the contrary, might soon follow an opposite trend. The lower oil price will probably start to affect the consumer price index with a lag in the coming months, but growth in energy prices and statistical base effects will act in the opposite direction. Core inflation is also maintaining relatively fast growth (given the tight labour market conditions and fast growing wages). According to the analysts, this might lead headline inflation to rise further and cause the CNB to tighten monetary policy again. Slowerthan-expected economic growth was mentioned as a potential anti-inflationary risk. CPI: ACTUAL DATA AND 1Y PREDICTIONS OF ANALYSTS (AVERAGE) AND OF CNB (%) 3.1 CPI AT 1Y: PREDICTIONS OF INDIVIDUAL ANALYSTS 2.7 2.3 1.9 range 1.1 CNB 0.7 ANALYSTS
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 2.8 2.3 12.17 4.5 3.2 2.9 2.8 1.18 3.4 2.9 maximum 3.1 3.1 4.18 3.5 2.9 6.18 3.4 9.18 3.1 2.9 10.18 3.1 11.18 2.9 12.18 2.9 2.8 At 2.4%, the refined growth estimate for the Czech economy in 2018 Q3 is 0.1 pp higher than the preliminary estimate, but the analysts are less optimistic than they were in November and have shifted their forecasts 0.1 pp downwards on for this year and the next. Domestic GDP is thus expected to grow at an annual rate of 2.9% in 2018 and 2.8% in 2019. The range of the forecasts for 2018 narrowed due to a decline in the maximum value. Although the extreme values of the outlooks for 2019 declined markedly, they did so to an equal extent and their range was thus unchanged. The growth of the Czech economy relies mainly on domestic consumption and investment. By contrast, the analysts feel that the German slowdown is harming Czech foreign trade, which is recording only slight growth in exports amid strong imports. According to the analysts, greater sensitivity to external economic developments, along with higher policy rates, less accommodative fiscal policy and reserves in drawing down EU funds, may be why the Czech Republic is lagging behind the other CEE countries in terms of growth. The Czech economy is likely to slow slightly next year, but the growth is expected to be more balanced and the current pro-growth components should be joined by a positive contribution of foreign trade. An escalation of international trade tensions, Brexit and a slowdown of the Chinese economy are seen as potential risks that might lead to slower GDP growth in the Czech Republic. GDP GROWTH IN CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS 5.0 4.5 4.0 3.5 0.5 0.0-0.5 - - 2016 2017 7-16 10-16 1-17 4-17 7-17 10-17 1-18 4-18 7-18 10-18 2018
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 12.17 0.50 1.27 1 1.73 1.62 5 1.86 2.31 1.18 0.71 1.32 1.16 1.79 1.67 5 1.88 2.31 3.18 0.75 1.34 1.14 1.76 1.67 4 1.88 2.32 6.18 0.81 1.40 1.22 1.83 1.86 2.19 5 2.46 9.18 1.45 2.16 1.89 3 2.34 2.68 2.40 2.86 10.18 1.71 2.25 5 7 2.63 2.89 2.65 0 11.18 1.75 2.29 2.20 2.66 9 2.87 2.63 2.94 12.18 1.75 2.30 2.20 2.65 2.43 2.79 2.42 2.78 FORECASTS: MINIMUM, AVERAGE AND MAXIMUM 2W REPO, 12M PRIBOR, 5Y AND 10Y IRS (%) 2W repo rate 12M PRIBOR 5Y IRS 10Y IRS 2018 1M 1Y 1M 1Y 1M 1Y 1M 1Y minimum 1.75 0 2.10 2.30 2.30 0 2.20 2.35 1.75 2.30 2.20 2.65 2.43 2.79 2.42 2.78 maximum 1.75 0 2.25 2.93 2.60 3.40 2.60 3.40 ACTUAL INDICATOR VALUES AS OF FORECAST DEADLINE (%) 2W 12M 5Y 10Y repo rate PRIBOR IRS IRS 14.12. 1.75 2.21 2.35 2.28 According to the analysts, the combination of weaker external demand, low oil prices and especially slower growth in the consumer price index has led to a weaker need to tighten CNB monetary policy. In line with the communications made by Governor Rusnok, none of the respondents expressed an expectation of a change in interest rates at the final CNB Board meeting this year. However, policy rates are expected to be increased further next year, due to a rise in headline inflation and relatively high core inflation. Most of the analysts expect the 2W repo rate to be at % at the end of 2019, in line with the November survey. The main risks to this scenario are slower economic growth in the Czech Republic, weaker external demand and slower energy price growth due to lower oil prices, or, in the opposite direction, a weaker exchange rate of the koruna and faster nominal wage growth. ANALYSTS FORECAST - 2W REPO RATE LEVEL IN 1Y (%) 2W repo rate level in 1Y (%) 1.75 0 2.25 0 2.75 number of analysts - current survey 0 4 6 7 0 -previous survey 0 4 6 7 0 As with the 2W repo rate, the opinion on PRIBOR interbank reference rates was little changed, so the changes were cosmetic on, amounting to 1 bp. The shift is more pronounced for swap rates, though. In line with the decline in current IRS rates (especially at longer maturities) and the reversal of the swap curve, the analysts forecasts shifted to an inverted shape, ranging from 7 to 21 bp.
IV. INTEREST RATES 6 12M PRIBOR AT 1Y : ACTUAL DATA, AVERAGE AND RANGE OF PREDICTIONS 0.5 % 2.6 2.2 1.8 1.4 2W REPO AND 12M PRIBOR: 1Y PREDICTIONS OF INDIVIDUAL ANALYSTS 12M PRIBOR 2W REPO 0.0 ANALYSTS 5Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS 3.5 0.5 0.0 10Y IRS AT 1Y: AVERAGE AND RANGE OF PREDICTIONS 3.5 0.5 0.0
7 V. EXCHANGE RATE 1M AND 1Y EXCHANGE RATE FORECAST EXCHANGE RATE FORECAST EUR/CZK EUR/CZK 1M 1Y 2018 1M 1Y 12.17 25.51 24.85 minimum 25.60 24.00 1.18 25.43 24.80 25.78 25.09 4.18 25.29 24.59 maximum 26.10 25.60 6.18 25.51 24.64 9.18 25.53 24.82 10.18 25.62 24.89 11.18 25.86 25.07 14.12. 25.80 12.18 25.78 25.09 ACTUAL EUR/CZK AS OF FORECAST DEADLINE Relative to the previous survey, the koruna strengthened from CZK 25.99 to CZK 25.80 to the euro, which represents a return to the October level. The changes in the analysts forecasts for the koruna s exchange rate traditionally depend on the latest exchange rate developments, but this time this applies only to the very short onemonth outlook, which moved to a stronger level (CZK 25.78 to the euro). Conversely, the one-year forecast shifted slightly to a weaker level (CZK 25.09 to the euro). The analysts still expect fundamentals (such as favourable fiscal balance and balance of payments developments and a positive interest rate differential) to prevail over time and the koruna to return to an appreciation trend. EUR/CZK: ACTUAL DATA, 1Y PREDICTIONS AND THEIR RANGE 28.0 EUR/CZK AT 1Y: PREDICTIONS OF INDIVIDUAL ANALYSTS 26.0 27.0 25.5 26.0 25.0 25.0 24.5 24.0 prediction 2 24.0 23.5 ANALYSTS
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 8.0 5.3 12.17 6.7 7.0 8.3 6.7 1.18 7.2 5.0 maximum 8.6 8.3 4.18 7.2 5.2 6.18 7.8 5.6 9.18 8.2 6.3 10.18 8.3 6.4 11.18 8.4 6.5 12.18 8.3 6.7 The wage rose by 8.5% in 2018 Q3. This represents a slight slowdown in year-on-year growth (of 0.1 pp) by comparison with 2018 Q2. The analysts also lowered their nominal wage growth forecast for this year by 0.1 pp to 8.3% on. This notwithstanding, the Czech labour market is continuing to overheat amid labour shortages and high demand for labour. Wages are expected to continue rising at a high pace next year. The public sector will play a large role in this, as the minimum wage will increase and wage scales will rise significantly. The analysts are thus more optimistic about the outlook for next year than they were in November and have increased their forecast by 0.2 pp to 6.7%. Given the low inflation, wage growth is high in real terms as well. This should keep consumer demand and its share in GDP growth at a high level. WAGE GROWTH - END OF CURRENT YEAR: AVERAGE AND RANGE OF PREDICTIONS (%) 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 2016 2017 2018 prediction 7-16 10-16 1-17 4-17 7-17 10-17 1-18 4-18 7-18 10-18