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Czechia Watch: Inflation back on the target
Inflation returned to the CNB's 2% target in June after two months. This result comes as a surprise to the market, as none of the analysts in the Bloomberg poll predicted such a decline.
The main reason for the year-on-year decline from 2.6% in May to the current 2% was a further decline in the food and non-alcoholic beverages section, which fell by around 4%. Prices in transport, recreation and culture also had a positive impact on lowering inflation. Conversely, price increases continued in the housing sector, with water, sewerage and electricity prices continuing to rise at double-digit rates. The rate of growth in prices of goods fell again, from 0.9% to 0.2%. Services continued to grow at a rate of around 5%, with prices in dining and accommodation continuing to show high growth.
The macroeconomic forecast of the Czech National Bank published in May predicted inflation of 2.4% in June. The lower result may therefore slightly challenge the view of the Bank Board that slowing down the pace of monetary easing is necessary. In response, the koruna is weakening further within the trend that we have observed since June. The koruna weakened following the publication of this data and broke above the 25.30 EUR/CZK level. We believe that there is room for further rate cuts and this outcome reassures us of that belief. However, we still expect the pace of rate cuts to slow down at the August meeting where we anticipate a 25bps cut.
The June CPI result came in well below our and the market forecasts, including the Czech National Bank. Inflation is back on target at 2%, but upside risks to inflation remain. Further developments in the food section will be crucial, as, contrary to expectations, the decline in prices in this section is yet to slow down.
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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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