Inflationary pressures are easing

The Czech economy remains subdued in 2H23, which is unlikely to change much in the coming months. Domestic demand is negatively affected by high inflation and falling real wages, with a recent cooling of foreign demand adding to this. A recovery is therefore likely to take place only in the course of next year, and, moreover, only gradually. Although real wages will start to rise again next year, unemployment is likely to increase. However, along with the weak economic performance, inflationary pressures are easing and inflation is expected to return towards the target in 2024.

The CNB could cut rates in December, as inflation is expected to be low next year. Uncertainty continues, however, as part of the board may prefer the first rate cut only next year. Whether the CNB starts this year or in 1Q24, it should be cutting rates gradually over the next year, as their current level is too tight, in our view. The koruna remains at weaker levels. While it could strengthen slightly next year, due to improving macro developments and better market sentiment, this is unlikely to be a significant move, as the CNB's falling rates will act in the opposite direction.

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