Manufacturing industry continues to drive Czech economy, CNB likely to hike rates in H2 2018

The Czech manufacturing industry continues to mainly drive the economic growth. However, most of the other sectors are also indicating a positive trend. Increase in wages and positive expectations of consumers are supporting a rise in consumption on the demand side of the economy. Currently, any fundamental economic changes or reforms are unlikely due to the Autumn Parliamentary elections, noted KBC Market Research in a research report. Furthermore, the progress of Czech’s preparations for joining the euro area is unlikely in this and the next electoral term.

The Czech National Bank abandoned the exchange rate intervention regime earlier this month. As a result, the nation’s monetary conditions tightened. Therefore, the central bank has no reason to tighten the monetary policy soon as it could be apprehensive about the rapid strengthening of the Czech koruna because of the widening of the interest rate differential. According to the KBC Market Research, the CNB’s first rate hike might take place in the second half of the next year.

“We believe the Czech koruna should post gains in the mid to long-term after the end of the interventions seeing it in 1Y horizon about 5% stronger (slightly below 26.00 EUR/CZK)”, added KBC Market Research.

However, in the short-run, the CZK might be volatile in both directions.