Page 23 - CE Outlook Regions 2022

According to the CNB´s forecast, inflation will rise significantly at the
start of 2022 to 7%, moving well away from the upper boundary of
the tolerance band around the CNB’s target, due to a combination of
several strong inflationary factors. At the end of 2021 and the start of
2022 a sharp rise in market interest rates is expected. In late 2022
and early 2023, over the monetary policy horizon, inflation will
decrease close to the 2% target.

Food price inflation will increase further as a result of growth in
agricultural commodity prices. Core inflation will also rise further,
driven by a rapid growth in foreign producer prices. The rise in
prices of electricity and natural gas will cause administered price
inflation to soar at the start of 2022.

Long overloading of global supply chains, which, together with a
weaker exchange rate and higher growth in energy prices as well as
imputed rent, could result in even higher inflation than forecasted,
CNB warned.

As projected in the EC´s outlook, regulated energy prices are set to
be raised at the beginning of 2022. Well-anchored inflation
expectations are projected to prevent temporary price pressures
from becoming permanent, allowing inflation to slow to 2.3% in
2023.

The CNB raised its interest rates again in December 2021 as
expected, which reflects a need to react to the combination of
exceptionally strong price pressures in the domestic and foreign
economies and prevent them from passing through to inflation in the
longer term. The Czech central bank is expected to continue in this
policy in February 2022, followed by only fine-tuning the tightening
cycle later in June, said Deputy Governor Tomas Nidetzky at the end
of 2021.

During 2022, a gradual decline in interest rates towards the 3%
long-run neutral level will become possible, as inflation will have
started to decrease towards the target thanks to the forceful
monetary policy tightening. The labour shortages will put continued
pressure on inflation in 2022, but consumer spending could
moderate, amid a "perfect storm" of sluggish growth and rising
inflation caused by the COVID-19 pandemic, Nidetzky explained the
central bank's decision to go on with interest rates hike.

Supply bottlenecks and demand spikes are both driving prices, and
although fiscal consolidation in 2023 plus monetary tightening
should ease some price pressures, most central board members
expect bottlenecks to persist.

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