Making progress…but at a snail’s pace

Slow economic recovery After last year’s stagnation, we expect GDP growth of just 0.7% this year and an acceleration to 1.9% next year. This is a worse outlook than our previous forecast, but we still expect stronger household consumption to contribute to the economic recovery, supported by continued real wage growth. We see industrial activity remaining weak this year.

Inflation to fall below target by 2025 We estimate that inflation will average 2.3% this year and decline to 1.7% next year. We expect it to be pushed below the 2% target mainly by lower growth in core and regulated prices, reflecting an excessively tight monetary policy, still-weak demand and falling energy prices.

CNB to cut interest rates further While central bankers have pointed to a slowdown in the pace of rate cuts, recent data support further significant monetary easing. We expect the key repo rate to end the year at 3.75% and to reach its terminal level of 3.5% in February next year.

The decline in market interest rates may be over A resumption in the positive slope of the koruna curve next year may be supported by a rise in longer-term foreign interest rates, reflecting concerns about the deteriorating fiscal situation in the major economies.

Better times ahead for the koruna The koruna should be supported by the CNB’s only gradual easing of monetary policy and improving domestic economic fundamentals, as well as by the unwinding of long dollar positions in connection with the start of the Fed’s rate-cutting cycle.

Author: Jan Vejmělek,Jana Steckerová,Martin Gürtler,Jaromír Gec,Kevin Tran Nguyen