Czech Republic and Romania: Good and not so good

5 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

The National Bank of the Czech Republic (CNB) raised its key policy interest rate by 25bp to 1.0% last week, continuing its gradual tightening cycle that began in August 2017 (four hikes by a cumulative 95bp). The labor market is still hot – unemployment has fallen to a record low 2.3% and nominal wage growth was +8.6% y/y in Q1 – but otherwise overheating concerns are in check. Inflation edged up to 2.2% y/y in May, slightly above the CNB’s 2% target but below the average 2.4% recorded in 2017. We expect further gradual monetary tightening and average inflation of 2.2% in 2018.

In contrast, the National Bank of Romania (NBR) decided today to keep its key monetary policy interest rate unchanged at 2.5%, despite still mounting overheating concerns. Inflation rose to 5.4% y/y in May, well above the NBR’s 2.5% ± 1pp target range, and nominal wages surged by +14.7% y/y in April  . Moreover, in January-April 2018, the current account deficit widened to –EUR2.1bn from –EUR1.8bn in the same period a year earlier. We believe that decisive monetary tightening is needed and should come by the end of 2018; otherwise the risk of a hard landing of the economy in 2019 will increase.