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.