Czech CPI maintains pace, warding off chances of negative rates

Czech CPI maintains pace, warding off chances of negative rates
By bne IntelliNews March 9, 2016

The Czech consumer price index rose 0.5% y/y in February, the statistics office reported on March 9.

The result is in line with expectations, and follows inflation of 0.6% in the first month of the year. On a monthly basis, CPI came in at 0.1%.

While remaining low, inflationary pressure in the Czech Republic continues to prove stronger than for regional peers. The February reading likely confirms that the Czech National Bank will maintain its ongoing monetary policy.

The main inflationary factors in February included the rising prices of alcoholic beverages and tobacco, tourism, housing and clothing. "To sum up," writes Jiri Polansky at Erste, "there is a positive spillover of higher domestic demand into prices." However, that was not enough to outweigh anti-inflationary factors, in which fuel prices star. Imported low inflation from the Eurozone is also a factor.

All of which suggests the central bank's cap on the koruna at CZK27 to the euro continues to shelter the Czech Republic from the ultra-low inflation plaguing Hungary and deflation in Poland. Given that, the conservative CNB is unlikely to be pushed into further action by adopting negative interest rates, despite rising speculation it may need to do so.

"We do not expect that the new data itself should affect the monetary policy in the Czech Republic, as the CNB will not abandon the FX cap this year," Polansky suggests. "More concretely, the CNB will analyze the spillover of domestic demand and higher wage costs into prices, but the inflation development in the Eurozone will remain the most important anti-inflationary factor affecting the CNB’s behavior."

However, the European Central Bank could tip the balance later this month, with expectations that it will offer further easing. Should the ECB go for deep cuts in policy, that would apply extra pressure on the cap.

"If the ECB is more aggressive … the CNB will be tempted to follow and cautiously pull its rates into the negative territory at the end of the month," predict analysts at KBC.

For the meantime, the CNB is spending around €2bn per month on market interventions. Analysts at RBI forecast the Czech central bank can stand that. "Unless the intervention volumes reach approximately €6bn monthly in the upcoming months, the CNB will rather intervene than introduce negative interest rates," they write.

While CPI remains well below the CNB's target of 2%, analysts expect inflation to build gradually through the year, as signs of a recovery in oil prices grow. KBC forecasts CPI will drop below 0.5% in the coming months, but rebound to above 1% in late 2016.

"At the turn of the year, inflation should reach the CNB’s target," suggests Komercni banka. "Subsequently, the FX floor might be scrapped."