Czech currency seen firming in volatile year of 2019

Photo: Matěj Skalický, Czech Radio

A pre-Christmas poll by the Reuters news agency of several dozen analysts pointed to a likely strengthening of the Czech crown next year, bolstered by the anti-inflationary policy of the Czech National Bank’s (ČNB). Many analysts predict two rate hikes in the first half of 2019.

Photo: Matěj Skalický,  Czech Radio

As widely expected, the Czech central bank kept its main rate on hold at 1.75 percent at its final policy-setting meeting of the year, held on December 20th – after an exceptional four straight increases of 25 basis points each in 2018 between June and November.

Jiří Rusnok,  photo: Filip Jandourek,  Czech Radio
When Reuters took its poll of 37 analysts ahead of that meeting, the Czech crown was trading near 26 against the euro, almost 4 percent weaker than a poll by the news agency had predicted a year ago.

The weaker the crown, the more the ČNB will raise rates in 2019 to push back the annual inflation rate, which dropped to 2.0 percent in November – the central bank’s target – from 2.2 percent in October.

As noted by ČNB Governor Jiří Rusnok last week, the domestic economy still warrants a degree of tightening. He also pointed out that the majority of the bank board was inclined towards further normalisation towards the neutral rate.

So, analysts expect that the cycle may not be over, with some predicting at two or even three additional hikes in 2019, and certainly at least one in the first six months of the year.

Commerzbank analysts said in their “Strategic Currency Briefing” note for December that they assume two further interest rate hikes of 25 basis points each in the first half of 2019.

Analysts at ING Bank also said they expect the central bank to push with a February hike and deliver at least additional one more hike in 2019, unless there is a sharp deterioration in the global outlook.

“Even if the next inflation report in February will show less need for the overall scale of tightening, the environment has not deteriorated so significantly for the ČNB to move away from currently 5-6 implied rate hikes signalled for 2019 (combination of FX and interest rates),” ING Bank said in a note.

Photo: Steve Buissinne,  Pixabay / CC0
“That’s why we have a hard time seeing the ČNB delivering less than two hikes next year, and we still don’t rule out three hikes either.”

The central bank’s projections assume the crown will rally about 6 percent in 2019. According to the ČNB, a 1 percent exchange-rate gain delivers roughly the same amount of monetary tightening as a 25 basis-point rate increase.

Meanwhile, the Czech economy is driven mainly by private consumption, which is expected to have slowed to 3.0 percent for full-year 2018. Czech consumption is cooling in part due to some sectors reaching production limits, with the chronic labour shortage a major factor.

Currently, Brexit is considered to be the main negative risk for domestic economic growth, while investment growth is set to slow after peaking in 2018. The competitiveness of Czech exports could also be affected by increasing real unit labour costs.