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Czechia Watch: Inflation remains steady
The latest figures on domestic inflation have come as a surprise, with consumer prices rising by 0.3% month-on-month in August (2.2% yoy), in contrast to the expectations of both our forecast and the market.
Price developments in the alcoholic beverages, tobacco, food, and non-alcoholic beverages sections have contributed significantly to inflation. As previously indicated, the risk of annual inflation remaining in the upper band of the CNB's tolerance zone, as observed in the previous month, would materialise if food prices did not fall. As a result, inflation remained at 2.2%, in line with the figure recorded in July.
The August mom inflation rate was significantly affected by price trends in the food section. Therefore, when comparing year-on-year figures, the rate of decline in food prices slowed down for many items or, conversely, the price increase accelerated for some items. In line with our expectations, fuel prices fell both month-on-month and year-on-year. In contrast, the cost of housing continued to rise at a significant rate year-on-year. A similar pattern is evident in the food and accommodation sections, with growth rates reaching 6.8% and 8.5%, respectively. Overall, price growth in services has reached 5% again. This presents a notable challenge for the CNB in containing the inflationary pressure in these areas.
The macroeconomic forecast published by the Czech National Bank in early August assumed that inflation would fall below the 2% inflation target in August. However, we do not anticipate this outcome will impact our outlook for future monetary policy. While the CNB's forecast indicates that rates may remain at their current level by the end of the year, we believe that the bank board has the flexibility to continue the rate-cutting cycle, given the favourable inflation developments in the monetary policy horizon and the continued underperformance of the Czech economy. We anticipate the next meeting, scheduled for the end of September, will result in a 25 bp interest rate cut. That could be followed by further rate cuts at the same pace at each subsequent meeting throughout the remainder of the year.
Following the unexpected high inflation reading in August, the koruna briefly strengthened slightly against the euro, reaching 25 CZK/EUR. However, it reverted to the EUR 25.05/CZK level, where it was before the data was published. Therefore, the market is not adjusting its expectations for the CNB's next step and continues to expect the key rate to be between 3.75% and 4.00% at the end of the year.
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Martin KRON
Czech Republic Martin is a macroeconomic analyst at Raiffeisenbank in the Czech Republic. Martin studied economic policy as a major at the Faculty of Economics and monetary economics and banking as a minor at the Faculty of Finance and Accounting of the Prague University of Economics and Business. After the graduation in 2021 he started to work in Department of Financial Management at Ministry of Culture. Since June 2023 he has joined the economic research team located in Prague. With his academic background he is very interested in the monetary and the fiscal policy and their impact on the economic performance. He is a passionate sport fan so in his free time he enjoys playing mostly tennis and football with his friends.
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