Page 16 - CE Outlook Regions 2023

2.1.2 External environment

The latest figures in the trade balance of goods for October 2022 ended
in a deficit of CZK26.8bn, which is an increase of CZK10bn y/y. The
trade balance has been in deficit for nine months in a row after the y/y
increase in the trade deficit in crude petroleum and natural gas, driven
by rising prices in world markets. This trend was mitigated somewhat by
the favourable influence of a larger trade surplus in motor vehicles.

Czechia’s dependency on Russian energy imports makes it what the
IMF called one of the “economies most exposed to the Russian gas
supply cuts”, together with Hungary and Slovakia.

Czechia’s economy is an export-oriented one, particularly linked to its
largest trading partner Germany and prone to be affected by
developments in the German economy, which is expected to shrink.

2.1.3 Inflation and monetary policy

Czechia’s inflation is one of the highest in the EU at 16.2% y/y. After a
welcome 2.9% m/m decrease in October to 15.1% it went up again by
1.2% m/m in November and is not yet expected to be at its peak. While
the October drop was attributed to government interventions, the
November spike was driven by rising housing and food prices.

Czech National Bank (CNB)mGovernor Ales Michl expects the peak of
around 20% inflation to come after New Year. His colleague from the
CNB board Tomas Holub told the Joint Vienna Institute webinar in
mid-December that “most probably we have passed the peak of core
inflation” at 13.8% in November, and that the momentum is now
slowing. CNB does not expect to reach its target level of inflation of
around 2% until 2024.

The EC predicts average annual inflation of 9.5% for 2023 and the
Czech cabinet projected 8.8% for 2023 in its budgetary report.

Since the current Governor Ales Michl was appointed to head the CNB
together with two more changes on the board, the central bank went
from being one of the most hawkish ones to one of the most dovish
ones in the region.

Interest rates have remained at 7% under Michl and with one of the two
critics of not raising the rates Marek Mora leaving the board in
February, local market analysts do not expect the current CNB board to
change its interest rate policy. In his comment after the last CNB board
meeting in December, Michl, however, did not explicitly rule out hiking
interest rates, saying the next board meeting will discuss this option.

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