Czech exports, household consumption primarily drive economic growth

Economic growth rate of the Czech Republic is gradually slowing this year, after expanding strongly in 2015. Exports and household consumption are mainly driving up the demand side of the economy. On the contrary, investment activity has slowed considerably. In spite of record-breaking employment and acceleration in wage growth, inflation continues to be quite below the target level set by Czech National Bank.

The current government is unlikely to put in place any considerable economic and political reforms or changes except the unified electronic record of sales, said KBC Market Research in a report. Similarly the nation is not expected to take any steps to adopt the euro in the near future.

The inflation projection still foresees reaching the inflation target in the second half of next year, thereby freeing the central bank to discontinue its exchange rate system, with the CNB Board anticipating the discontinuation in mid-2017. Meanwhile, the Czech National Bank projects a considerable increase in short-term market rates in the third quarter; however, this is quite unlikely to happen, stated KBC Market Research.

Furthermore, when timing the departure, from its interventions and rate hikes, the central bank would also have to consider the ECB policy in order to avert unnecessarily setting of excessive inflows of speculative capital.

“We can add that the idea of putting negative interest rates in place in the Czech Republic is not on the agenda at all”, noted KBC Market Research.