The CNB has kept its 2016 CPI inflation forecast at 0.6%, unchanged from August, according to a summary of the new inflation report and a table with basic macroeconomic indicators forecast released today. According to the forecast, both headline and monetary policy-relevant inflation will speed up more significantly in Q4 and will hit the 2% inflation target at the monetary policy horizon – in particular in Q3 2017 (later than in the previous forecast for Q2), and exceed it by most — by up to 0.4pps, in Q1 2018 and then start returning to target from above during 2018. Inflation is seen at 2.1% in Q4 2018. The inflation acceleration in Q4 (to 0.6% y/y in October, 1.0% y/y in November and 1.3% y/y in December) will be underpinned by rising wages and price of capital amid continued economic expansion, while the already fading anti-inflationary effects from the import prices will be completely exhausted. As a result, the adjusted inflation excluding fuels will start growing as of next year. Food price inflation will also accelerate on the back of world agricultural commodities prices and the fading of one-off effects observed in 2015, administered prices will increase only gradually over the next two years, while fuel prices will rebound from their current strong annual decline at end-year and then rise in line with world oil prices. The forecast assumes that sustainable fulfillment of the 2% inflation target, which is a condition for abandoning the fx cap and returning to conventional monetary policy, will be achieved as of mid-2017 onwards. Consistent with the forecast is an increase in market interest rates in H2 2017 followed by a further modest rise in 2018. Exiting the fx cap would not result in strong crown’s firming to levels before the fx interventions started in November 2013 as meanwhile the weaker crown’s exchange rate has been passed through to the price level and other nominal variables, the CNB said. According to the forecast, the crown is seen to appreciate in H2 2017 and slightly firm in 2018.
The CNB has raised its 2016 GDP growth forecast to 2.8% from 2.4% previously expected on the back of expected to be stronger government consumption, possibly to reflect the raised spending (including the approved minimum wage and public sector employees’ wage hikes, higher discretionary pension hike) in the run-up to the 2016 regional elections. Still, main growth driver will remain household consumption on the back of further labor market improvement (the unemployment rate is seen to decrease to 5.0% in 2018) and faster wage growth (up by 4.2% in nominal terms this year, by 4.8% in 2018 — also to reflect the narrowing labor market), while co-financed by the EU funds investments are seen to temporarily drop this year. The expansion of the latter is to resume in 2017 and accelerate further in 2018, which would support stronger economic growth of 2.9% in the two years (down by 0.1pp against the August forecast). At the same time, temporary slowdown in external demand and less loose monetary conditions following the termination of the CNB’s fx commitment would play an opposite effect. The CNB expects the current account to report even stronger surplus this year on the back of the weak crown.
On the fiscal side, the CNB’s forecast for this year coincides with that of the finance ministry – the general government deficit is seen to reach 0.3% of GDP. As of 2017, the central bank is much more upbeat than the government as it expects the general government budget to be balanced against the FinMin’s plan for 0.5% of GDP gap. The fiscal balance is to shift into a surplus of 0.4% of GDP in 2018, the central bank said.