Czech inflation was strong again in March, rising to 2.6% y/y, statistics office CZSO reported on April 10. As elsewhere in the region, the data offers signs that the surge in prices seen in recent months is starting to slow. However, the central bank will be watching closely after scrapping its cap on the koruna on April 6, having hinted monetary policy could tighten further once markets settle.
The y/y increase in inflation was 0.1pp more than that recorded in February, giving the slowest rate of acceleration since September. The CPI was flat on a monthly basis, following gains of 0.8% in January and 0.4% in February.
The stabilisation of global oil prices and low base from 2016, added to erratic food prices, continues to drive the price gains. Food prices were the biggest influence on the rise in the CPI in March “again” the CZSO notes. Automotive fuel prices grew 16.8% y/y.
At the same time, the March rise is the highest reading since late 2012, and well above the Czech National Bank’s target of 2%. Although rate setters assert inflation is likely to fall back below that benchmark as the inflationary effects of commodities markets fades through the year, there is already suspicion that the central bank could be tempted to further tighten monetary policy. The March reading was 0.3pp above the CNB’s forecast.
However, analysts estimate that core inflation also rose further. The CNB spent early 2017 insisting that it would persist with its cap on the koruna at CZK27 to the euro whilst awaiting evidence that the return of inflation towards its target is sustainable. However, no sooner has the regime been dropped than central bank officials have begun mentioning the possibility of rate hikes.
The benchmark interest rate could be raised towards the end of 2017 or early next year, if inflation develops sustainably, Governor Jiri Rusnok said in comments published on April 10.
The benchmark interest rate has sat at virtual zero since November 2012. The currency cap was introduced in November 2013 in a bid to stimulate the export-led economy and stave off the deflation that stalked the rest of the region in 2014-16.
“Rising core inflation may start to shift attention towards the timing of the first interest rate hikes,” suggest analysts at Capital Economics. “For our part, we think these are likely to occur in 2018.”
However, at Erste they expect the inflation surge to have waned by next year. "Although some pro-inflationary factors are temporary and we expect a correction downwards (prices of some food items and fuel), we also expect the domestic pro-inflationary pressures to strengthen," they write. "Thus, inflation will increase to approx 2.8% y/y in 2H17. However, it will return to 2% in January 2018, as the significant contributions of food prices will fade."