Czech Economics: Real GDP Growth Slower Than Expected, but Inflation Risks Keep the CNB Cautious

Research evidence excerpt

Czech Economics: Real GDP Growth Slower Than Expected, but Inflation Risks Keep the CNB Cautious

Inflationary Pressures). There is also a continuing risk of

second-round effects from any further increase in oil and gas prices amid the

fragile situation in the Middle East. Since the June meeting, however, several

signals have emerged that domestic inflationary pressures are easing. Following

record-high volumes in previous months, new consumer and housing lending has

slowed, higher market rates are gradually feeding through to mortgage rates, and

there are early signs that house-price growth may be peaking. Expectations of

future price increases in construction and services have also moderated,

households’ concerns about inflation have eased, and the short-term momentum

of core inflation has slowed significantly. Additional inflationary pressures from

import prices are being dampened by the strong CZK. Weaker-than-expected GDP

growth further strengthens the case for waiting.

The latest communication from Bank Board members is consistent with interest

rates remaining at their current level of 3.75% after the August meeting.

Governor Michl has said that his baseline scenario is now a period of assessing

incoming data, the outlook, developments in inflation risks and the impact of

restrictive monetary policy. Under this scenario, the CNB will allow monetary policy

restraint to work while the Bank Board evaluates incoming data and updated

forecasts. Board member Kubicek sees scope for one more rate increase by the end

of the year but sees no need to rush and considers market pricing of as many as

three hikes excessive. Another Board member, Seidler, has already explicitly

supported keeping rates unchanged and waiting for further domestic and external

data.