The Czech National Bank (CNB) in Europe after the Great Recession. Not content with that ‘credit’, the CNB made another move higher (the eighth since it began hikes in August 2017) last week in an attempt to control inflation and prevent its economy from overheating. The CNB is being forced to go against the world’s major central banks, which will stop this year in the face of weak inflation and slowing economic growth.
The Czech economy is experiencing a somewhat different situation from that of the Eurozone. Inflation has accelerated to 3% in the month of March, a maximum not seen in the Czech Republic since 2012.
The unemployment rate stands at 2%, the lowest since Eurostat recorded unemployment data, and 4.7% in real terms (discounting inflation). Although GDP growth has slowed down, the variation rate continues to exceed 2.5% per year. All this has led the Czech National Bank to raise its main interest rate by 25 basis points to 2% in an attempt to cool down the economy and price growth.
Moritz Degler, an economist at Oxford Economics, explains in a note that “the CNB is challenging the dovish tone of monetary policy globally…a weaker-than-expected exchange rate has helped push inflation up to 3% , right in the highest part of the tolerance range set by the CNB”.
Viktor Zeisel and Jaroslaw Janecki, economists at Societe Generale, assure that analyzing the data and expectations (growth, inflation, exchange rate…) presented by the central bank “they assume more rises in interest rates this year… although in the longer term they foresee rate cuts”. These economists believe the bank will raise the price of money once more in the second half of the year as the German and Eurozone economies in general pick up some of the pace of growth.
Oxford Economics economists point out that the strength of the labor market is also behind the growth of inflation. The vacancy rate in the Czech Republic is 6%, the highest in all of Europe and almost double that of Germany, the second in the ranking of this ratio.
“We expect labor shortages to continue to constrain the supply side this year, while wages will lose steam only moderately… after nominal wage growth slowed to 6.6% in December, in February they increased again by 7.1%”, the experts maintain.
Yet another rate hike this year is a very plausible scenario for these experts due to the following factors: a Czech crown that is proving to be weaker than expected, “a labor market that is very tight (low unemployment and many vacancies) that is promoting the growth of wages, consumption and inflation, and an industrial sector in Germany and the Eurozone that will begin to recover and demand Czech goods”.
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