Inflation on Target, Economy Limping Along
29/01/2025 16:18:49Czech economic growth to remain relatively weak this year While we estimate GDP growth at 0.9% in 2024, we expect it to accelerate to 1.5% in 2025. In our view, the only source of economic growth this year will be domestic demand, driven mainly by a continued recovery in household consumption. By contrast, industry is likely to contract for the third year in a row, contributing to a lower export performance of the economy.
Inflation to stabilise close to the 2% target in 2H25 The first half of the year could be marked by higher volatility, but inflation should remain safely within the CNB’s tolerance band. We expect inflation to be 2.2% in 2025 as a whole and to fall to 2.1% in 2026. Our expectation for easing inflation is based on cheaper energy, subdued consumer demand and weak industrial output. On the other hand, food and housing prices are likely to rise more sharply.
CNB to resume interest rate cuts this year This should be driven by an optimistic inflation outlook and a weak economy. We expect a 25bp cut at each meeting from February to June, after which the repo rate should have reached the 3% terminal level.
Market rates close to the normal CZK IRS with shorter maturities could still fall slightly with further monetary policy easing by the CNB, while the longer end of the curve should stabilise roughly around the current levels, in our view.
The koruna caught between a strong dollar and a recovering economy We expect the slow recovery of the Czech economy, the narrowing interest rate differential and strong USD to postpone any marked appreciation of the CZK vs EUR until the second half of this year. The currency should then be supported both by developments in global FX markets and by a gradual strengthening of Czech economic growth.