Speculation on negative rates rises as Czech CPI slump continues in March

Speculation on negative rates rises as Czech CPI slump continues in March
By bne IntelliNews April 11, 2016

Czech consumer prices slumped again in March, with the CPI managing a rise of no more than 0.3% y/y, data from the statistics office showed on April 11.

As in the rest of the region, the hints of a recovery of inflation in early 2016, spurred by apparent stability in oil prices appear to have evaporated. That has raised speculation that the Czech National Bank could yet be forced to offer more monetary easing by adopting negative interest rates. The CPI data for March does little to quash those bets.

On a monthly basis, consumer prices fell 0.1%, following a 0.6% m/m decline in February. The annual inflation rate: the increase in the average CPI over the 12 months to March 2016, reached 0.4%

A significant decrease was recorded in fuel prices, which fell 15.3% y/y in March. Prices in other industries, including food products, utilities and housing rose. “The biggest influence on the growth of the price level in March came from prices in 'alcoholic beverages and tobacco', where prices of alcoholic beverages went up by 3.6% and tobacco products by 2.4%”, the statistics office said.

The central bank’s Monetary Policy Council left its policy rate on hold at 0.05% last month. Minutes from the March 31 meeting confirmed, however, that policymakers continue debating a potential move to negative interest rates. While senior figures on the council are clearly unenthusiastic, there are some members keen.

“The majority of board members still think that there is no need for this tool and that it could challenge financial stability," Commerzbank points out. However the analysts predict the move will come; they forecast a benchmark rate of -0.15% by the end of the year.

The CNB is first likely to formalist the extension of the cap on the koruna. The central bank said following its March meeting that the limit on the currency will probably remain in place “closer to mid-2017”.

Given the clear instinct to stay clear of negative rates by most at the conservative CNB, the rate setters will continue to hope Czech inflation will finally respond to the recovery in commodities pricing in the coming months.

"It seems that the Czech consumer price index has not reacted to higher oil prices, which were already the case in March," KBC writes. "Thus, the impact of higher [fuel] prices should be visible in ... April. Still, we expect a modest decline in year-on-year inflation even next [month] to 0.2% y/y."

Should that be the case, the speculation of a move to negative rates will only rise. KBC suggests it sees a 40% chance that the CNB will make the move. Others note the issue is gathering more and more momentum.

"The minutes are not telling us that interest rates will be negative soon, but the argument is developing gradually," the analysts at Commerzbank point out. "A few months ago, there would not have been much of a debate."