Czech Republic Economic Outlook: Anticipating the First Rate Cut

Czech Republic: The first rate cut is coming

The Czech economy posted negligible quarter-on-quarter growth of 0.1% in the second quarter and the latest monthly data show moderate growth in industrial and retail sales after very weak numbers in the first half of the year. However, the picture is still mixed. Looking at the details, we see that the only real driver of the economy is the auto sector and demand from abroad. Thus, full-year growth looks like it will be weaker than we previously forecast, but we still expect a rebound in the coming months, which the early data are already suggesting.

Inflation fell to 8.8% YoY in July and was in single-digit territory for the second consecutive month and the lowest in the CEE region. Disinflation should continue in our view in the coming months but at a much slower pace. In addition, fuel prices have surprisingly risen following the excise tax hike, pushing inflation 0.3-0.4pp above our earlier forecast. Even so, inflation should be in the 7-8% YoY range in September. However, thanks to the base effect, inflation will rise back above 8% in October and remain there for the rest of the year. In January, inflation is expected to fall into the 2-3% YoY range, close to the Czech National Bank's target, due to the massive base effect and seasonality.

We continue to expect the Czech National Bank to cut rates by 25bp for the first time in November. However, there is a clear risk that the central bank will want to stay on the safe side and wait for the January inflation number. This would mean delaying the rate cut until the first quarter of 2024.

On the fiscal side, we have seen a big turn to the positive side in recent months. The government budget deficit has stabilised and there is a good chance that the government will deliver on its deficit target. Moreover, the government is continuously discussing further savings for this year. For next year, parliament has already approved a consolidation package in the first round and a continuation of the legislative package can be expected in September. Given the government's majority in parliament, we expect approval during October.