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Strong growth will continue in 2018 and 2019, driven by robust private demand and a dynamic external sector. Increasing wages will support household consumption and low interest rates will boost capital investment. Labour shortages will weigh on growth. Historically low unemployment will push inflation above the central bank’s 2% target.
Following the removal of the exchange rate floor in April 2017, the value of the koruna has appreciated slightly. Monetary policy should continue to tighten gradually to counter inflation pressures. Given current and expected primary surpluses, the government could boost infrastructure investment and leverage EU funds. Structural policies to reduce labour shortages and raise labour productivity – such as reducing skills mismatches – would facilitate faster growth and sustain higher wage levels.
The financial sector is appropriately capitalised, liquid and profitable. However, the low levels of interest rates and strong economic activity have boosted mortgage credit demand and pushed up house prices. Decreased risk weights assigned to mortgage loans in many banks may amplify risks posed by the housing market and associated loans. A change in prudential rules may be needed as a result.
Economic Survey of Czech Republic (survey page)