Economy Reluctant to Take Off
23/10/2024 11:25:31Two years of weak growth for Czech economy After last year’s stagnation, we expect GDP to grow by 0.8% this year and 1.5% next year, a weaker outlook than our previous forecast. Growth should be driven mainly by rising domestic demand but is likely to be held back by a slow recovery in household purchasing power and subdued industrial activity.
Inflation should fall below 2% in 2025 However, we expect it to remain in the upper half of the CNB’s tolerance band until the end of the year, averaging 2.5% in 2024. Next year, we forecast a decline to 1.8% on the back of still-weak consumer demand and lower energy and fuel prices. Core inflation should remain slightly above 2% in 2025, reflecting accelerating house price growth.
CNB to cut repo rate to 3% We expect the central bank to continue cutting interest rates by 25bp at each meeting until May 2025. The economy, whose weaker potential growth points to a lower terminal rate, should be the main driver of further monetary easing. However, the CNB board’s communication remains hawkish, making higher rates a risk.
Market rates on the way to stabilisation Compared to our previous forecast, the lower outlook for CZK market interest rates reflects faster monetary policy easing by the ECB and Fed and a lower CNB terminal rate. However, we do not see much room for CZK IRS to fall further despite the ongoing monetary policy rate-cut cycle.
Koruna could do well next year Increased uncertainty and the slow economic recovery are likely to prevent the koruna from strengthening significantly this year. In 2025, however, the Czech currency should appreciate below EURCZK 25, supported by both developments in global FX markets and a gradual improvement of GDP growth.