CZ: Wage developments remain proinflationary

In the third quarter of this year, the average nominal wage in the Czech economy increased by 1.8% quarter-on-quarter and 7.0% year-on-year. These figures exceed our forecast. Wage development is positively influenced by low unemployment, the recent significant decline in real wages (leading to higher wage demands from employees), wage increases in the public sector, a rise in the minimum wage, and economic recovery. In real terms, wages have resumed growth this year, driven by solid nominal wage increases and declining inflation.

The factors contributing to robust wage growth are expected to persist over the next two years. Additionally, an improved recovery in the Czech economy is anticipated, with GDP growth projected to exceed 2% next year, compared to this year's expected 1% growth. Consequently, we forecast wage growth to exceed 5% for both upcoming years (5.7% in 2025 and 5.1% in 2026), while the equilibrium (non-inflationary) wage growth in the Czech economy is estimated (by us) at around 4.5-4.8%. In other words, wage developments will remain pro-inflationary.

Today's higher-than-expected wage growth figure suggests a slight upward revision of our forecast for this year by two-tenths of a percentage point. Previously, we anticipated a full-year wage growth of 6.6%, but today's data make 6.8% more likely.

In real terms, wages have returned to growth this year, which will be relatively high due to low inflation. For 2024-26, we expect the average real wage growth to arrive at 4.2%, 3.1% and 2.7%, respectively. However, real wages remain below the levels of previous years, currently aligning with those of 2018.

Alongside service price developments, expansionary fiscal policy, and the koruna's exchange rate, wage growth is one of the most significant pro-inflationary factors in the Czech economy. Today's data align with this and underscore the need for cautious monetary policy by the CNB. At the December meeting, the CNB will likely decide between maintaining stable rates and a modest 25-basis-point cut. We slightly lean towards rate stability, though a minor reduction wouldn't be a major surprise. The market shares this view, also slightly favoring stability.

We currently anticipate the next rate cut at the May meeting, while the market expects February. Overall, we foresee only very gradual rate reductions towards the 3% level over the next two years, which we consider an equilibrium.

Given the relatively strong wage growth, the koruna might strengthen slightly after today, as the likelihood of maintaining stable rates at the December CNB meeting increases. However, global and geopolitical factors continue to significantly influence the koruna, and this is unlikely to change soon.