During the year, employment rose 1.1% to 5.5 million, while hours worked climbed 2.3%, suggesting the gains are real rather than statistical.

For real estate, the macro read is straightforwardly supportive: consumer spending at 3% sustains retail occupancy, while the investment uptick suggest industrial demand will continue. All of which means the Czech National Bank’s 3.5% base rate looks unlikely to change anytime soon.

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To be more specific: 36% of employees had to accept raises of less than 2,000 CZK monthly, while 41% could boast of just CZK 2k to CZK 5k more. The luckiest (24% of the total) are CZK 5,000 per month richer.

What about bonuses? Approximately 45% of employees expect a financial bonus at year-end, with 27% receiving them regularly and 18% receiving them as a special occurrence. That means that 42% of employees don’t receive bonuses at all, with 13% reporting they were informed that there are no funds for bonuses this year. The nominal wage in the third quarter increased by 7% year-over-year to 45,412 CZK. That works out to 4.6% real growth after inflation.

Platy.cz spoke with 1,484 respondents across various sectors and regions of the Czech Republic. The biggest wage hikes next year will take place in the private sector, where a shortage of skilled labor for specialized value-added work remains.

The post Czech wages rose 4.6% in 2024, after inflation first appeared on ThePrime.cz.

Ceska sporitelna’s analysts are predicting for example that inflation will fall still further to 8.6% in July and to 8.2% in August. Other local banks are essentially predicting a variation on that theme. Most analysts are also expecting the CNB to reduce interest rates at some point this year.

But there’s a big difference between 8% inflation and the accepted 2% that most central banks aim for. And that’s what should be worrying companies, investors and funds whose business model is based on the ultra-low interest rates we all got used to in the last decade. Because just as central bankers were under pressure to leave rates alone as we slipped into this inflation crisis, they will be reluctant to cut them as we ease our way out of it.

Consider recent quotes from the top tiers of the ECB. Its Governing Council member Francois Villeroy de Galhau warned readers of Bloomberg not to get too excited, just because European inflation appears to have peaked. “In the euro area, I believe we will soon reach the high point of interest rates,” he said. “But when I say high point this isn’t a peak, rather it will be a high plateau, on which we will have to remain for a sufficiently long time to fully transmit all the effects of monetary policy.” In fact, if you read that quote carefully, he’s basically confirming that rates will go up (probably on July 27) before they come down.

The Czech situation is far from ideal, but with interest rates of 7% it’s doing better than anywhere else in the non-euro portion of Central Europe. Hungary’s currently suffering from inflation of more than 20%. Things are so bad there that a recent reduction of a key interest rate to 17% is classified as good news. In Poland, inflation has fallen to 13% from its February high of 18%.

“The process of disinflation is in full swing in Central Europe,” said Nicholas Farr of Capital Economics. “In the coming months, inflation in the entire region should continue falling and we believe that it will be single digit in all the countries by the end of 2023.”

“However, it will take a long time before inflation falls to the goals of the central banks. Central banks will therefore be very careful over the next six to 12 months when reducing rates.”

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That’s also connected with higher growth…a silver lining for the cloud. The central bank has raised interest rates to curb inflation, but there are multiple influences on that.
When you raise interest rates, that’s anti-inflationary. When you have a recession, as we do in the Czech Republic, that’s also disinflationary. Slow economic growth helps drag inflation down. Then there’s the war. Ukraine and Russia are still at war, but we’re now 12 months on from that, so the shock effects from February/March 2022 is now baked into the inflation figures. We’re one year beyond that, so we’re no longer dealing with the shock effects.

Then there’s the currency. The deputy central bank governor stated clearly that the fact that the strong CZK has allowed them to leave rates where they are, rather than raising them further. Because in essence, the strong CZK is choking import price increases. Crude oil is cheaper in Czech koruna terms than if the CZK/USD was at 23. It’s now up to 21.5 per dollar. At the moment, we’re locked into a situation where there’s a premium for CZK interest rates relative to Europe and America, even though that premium is shrinking. In other words, as a speculator you can still borrow money in Euros or in dollars, put it in CZK and get a higher interest rate.

Does all of that tell you the Czech National Bank is right to risk recession by raising interest rates to 7%?
It tells me the economy is resilient. Technically, we’re in a recession, but it’s not a major downturn, it’s no disaster. It’s more of a needed pause in growth. Since the global financial crisis, everyone has feared the word recession. Everyone thinks that a recession is the same as the global financial crisis. It’s not. The global financial crisis was huge. A recession is just a contraction in which maybe 90% of the population isn’t seriously impacted, expect their wages don’t grow as fast, or they worry about their jobs. Unlike high inflation, which hits 100% of the population. What’s worse? And remember, inflation hurts the bottom half of the population harder.

Base euro interest rates have risen 250 bps to 3.75%. Doesn’t that mean that yields on prime properties in Western Europe have to go well above that? And that Prague yields can’t just nudge up by just 75 bps or 100 bps?
You would think so, because otherwise, you’re in a situation where investors aren’t getting much yield greater than the natural rate of inflation. That’s not a particularly attractive investment for an asset class that’s illiquid. The key thing about these large real estate assets is that they are mostly illiquid. It’s very difficult to securitize and break them up and sell them like a share. You have to factor that into the pricing. There has to be some kind of risk premium that’s added to the target return that justifies being invested in that asset.

The Czech National Bank has been hints recently that interest rates could actually begin falling in September. But then they say inflation would have to look like hitting single digits this year. And heading below five percent next year.
They are describing a scenario in which their inflation target in 18 months is 2%.

That doesn’t really seem feasible…it sounds more like central bankers trying to keep a market from panicking.
Correct. But they are basing their policy on what I’ve just said. Their current policy of 7% interest rates is based on the principle that in 18 to 24 months’ time, inflation will hit 2%. That’s their single mandate — to get inflation to 2% within that time frame.

With quantitative easing is being phased out, cash is being taken out of the system. What are you expecting the impact on property to be? Do you expect difficulties?
My analogy goes back to the bible — Joseph and Pharoah: 7 years of plenty and 7 years of famine. That’s my analogy. We’re in the 7 years of famine now.

Which year of the famine are we in?
Year 3. We’ve got several more years of this. You mentioned money supply. Money supply growth in the Czech Republic is negative, almost exactly the same as in the USA.

Why is that so significant?
Money supply has been positive in America for the past 90 years. And it’s been generally positive in the Czech Republic since 1990. What we’re seeing now in my view is the need to take the excess money out of the financial system. My view on the 2008 crisis is that they made the wrong decisions: bailing out the banks, rather than restructuring them properly. This set the conditions for a massive boom in asset prices in equities, in credit, in private equity and in real estate. With zero percent interest rates you created conditions where people binged on the asset markets, creating the “everything bubble“. All asset classes went up in value substantially.

What’s happening now is that you’ve got this great reset in terms of the risk-free rate. Instead of 0% it’s 4%. There’s a pervading view that 0% rates were the new new normal, since we had them for the past 15 years — and that these last 2 years were an anomaly. I would argue the opposite.

And we’re now reverting back to normal.
We’re reverting back to normal because we have high inflation. The result is that you’re sucking liquidity out of the economy. It’s like squeezing a sponge. You’re squeezing the water out of the economy, but then you realize there’s still more. It takes time to get all of that excess liquidity out of the economy. We’re talking about years of excess money supply growth. Now, the banks are having to choose who they lend to.

At the same time, issuing bonds basically isn’t possible anymore for property companies.
It’s accessible but at a price. People are still coming to us with real estate development ideas, but the yields are well above 10%. That’s what they’re offering us. It’s just not something we’re interested in. Eventually, though, there will be a ‘biting point’. If they start offering, say, 13% interest, someone may decide that it’s worth the risk. But that’s a very high interest rate and it would mean their exit yield then has to adjust [upwards]. That’s the key. You can’t borrow at 13% and then sell at 7%. It’s nonsense. They’re going to have to recalibrate their business models.

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The post Has inflation peaked? CNB leaves rates at 7% first appeared on ThePrime.cz.

Analysts contacted by Czech Television were pleasantly surprised by May’s positive figures, but most poured cold water on hopes of avoiding recessions. “In the coming period, there could be signs of reduced pressure in supply chains, which was reflected in the automobile sector,” said UniCredit Bank’s Patrik Rožumberský. “On the other hand, production will be hit by the rising prices of inputs combined with falling demand.”

Deloitte’s Filip Pastucha said inflation is eating away at consumer strength and would hurt overall consumption. Meanwhile, the uncertainties caused by the war, including the energy crisis, is casting a pall over the future. “We’re expecting industrial growth of roughly 1.5% for the year.” Growth in 2021 reached 6.6% thanks to the pandemic-struck 2020.

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In many countries, central banks talk about trying to engineer a “soft landing” for overheated economies. But faced with May’s consumer y-o-y inflation rate of 16%, the CNB’s governor straight-shooting Jiří Rusnok predicted that recession would arrive in in the second half of the year. Not to be upstaged in gloom mongering, prime minister Petr Fiala went on television Wednesday night to warn that Czechs would experience an energy shock this fall.

It’s odd to think that just one year ago, Czech interest rates were sitting at 0.5%, having spent the pandemic at 0.25%. Since then the ČNB has been tightening the flow of money, to the point that it succeeded in choking off the residential boom.

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“But” while the CNB is supposed to be politically neutral, it’s interesting to note that the interview his remarks are quoted from in Aktualne.cz are on the front page today of the Czech National Bank’s web page. So, Rusnok may be sending a message to his replacement, Aleš Michl. Two quick facts about Michl: 1) He’s an opponent of further rate hikes who was nominated by outgoing Czech president Miloš Zeman 2) He’s seen as an ally of the assumed candidate for next president, Andrej Babiš.

Asked if it’s true that the bank could raise interest rates (already at 5.75%) by another 75 bps, Rusnok did nothing to calm such fears. Asked if it’s true that the bank could raise interest rates (already at 5.75%) by another 75 bps, Rusnok did nothing to calm such fears. “What we know for the moment is that we have a weaker koruna than our model was counting on. So, we can’t limit ourselves with some ceiling. So, yes, for the moment it looks like three-quarters of a percent or more.”

Rusnok also swatted aside future CNB governor Aleš Michl remark that further rate hikes are pointless because the current inflation spike is “imported.” “No one has invented anything that’s better than what we’re doing,” he said. “If I had a better alternative under the rules, I wouldn’t mind a debate about it. But there is no such thing.”

So, interest rates should 6.5% by summer. That would mark a 6% hike in rates in just over a year. If that isn’t a head-on collision for mortgage-based demand for residential, what is? A lot of other things should be in play now, though. Consider: on the one hand, rates haven’t been this high in decades. On the other, an anti-rate hikes governor is about to take charge of the Czech National Bank. That smells a lot like like bond buying season.

Writing in Hospodářské noviny, Jan Chlumský (Amunid CR Asset Management) notes that Czech 10-year treasuries have fallen more than 20% in price over the past 12 months. “The million koruna question is whether the worst is over for Czech state bonds and if the time is ripe for buying them, for example through bond funds. For that scenario to work, we need above all stability and for a fall in domestic interest rates to be within view…We don’t know the ideal moment to start buying them, but the noise from the investment community suggests that not much time remains until the countdown to the start of ‘the new bond era’.

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Mark Robinson (EnCor Wealth)

So, when April’s inflation rate fell from 8.5% to “just” 8.3%,  headline writers jumped in to suggest that the worst might be over. Mark Robinson (EnCor Wealth) scoffs at them, saying their authors are “barking up the wrong tree.” He points out that in the United States, after a sharp spike in 1973, inflation settled into a sustained pattern of 5% per annum for the next ten years.

“The importance was not the initial spike but the sustaining of inflation rates well above Central Bank targets and an entrenching of inflation expectations in advanced economies,” he says. The same could be happening now.

Robinson’s primary concern is whether inflation has even finished spiking yet, since oil prices continues to rise along with war-induced food commodity prices. “There are strong underlying currents which suggest that inflation will sustain at or above 3%, perhaps over 5% for some time.” These include continued low interest rates in the United States (currently just 0.75%), low unemployment (which means consumers continue buying) and private and government sector spending on ESG adoption and sustainable transport and power.

Michal Stupavsky (Conseq)

Michal Stupavsky (Conseq Investment Management) says the danger for Czechs as well as globally is that price pressures are largely structural in nature and that major central banks are still printing money as part of their QE programs. “I strongly believe that we are now slowly entering a new era of higher secular global inflation,” says Stupavsky.

“The CNB will have tremendous problems bringing the Czech inflation rate back to its 2% target during 2023. However, significant new rate hikes by the CNB might trigger a serious economic recession in the Czech Republic. This could call into question the stability of the Czech financial system, especially considering the precarious situation of Czech households in terms of mortgage loans. Personally, I would take a wait-and-see approach for now, keeping CNB’s rates on hold while utilizing the FX reserves further in case of additional pressure on koruna. On top of that, in my opinion there might also be a discussion about potentially raising the CNB’s 2% inflation target.”

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