Czech Inflation Quickens as Central Bank Gauges Rates Cushion

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(Bloomberg) — Czech inflation accelerated for a second month on more expensive fuels as the central bank is expected to maintain its wait-and-see mode on interest rates when policymakers meet this week.

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Consumer prices rose 2.5% from a year earlier in April, according to a flash estimate from the statistics office on Wednesday. The headline figure matched the median estimate of analysts in a Bloomberg survey. The closely watched services price growth quickened to 4.8%, holding at levels that policymakers have called elevated. 

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Central bankers in Prague are weighing the inflationary effects of surging energy prices against the potential downside impact on growth from a weaker global economy due to the Middle East conflict. Officials have repeatedly said they won’t react to the primary surge in fuel costs but will closely monitor risks of a spillover into other prices.

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With slightly restrictive rates before the Iran war, the central bank has some room to wait with a policy change even as the headline inflation has moved above the 2% target, according to UniCredit SpA’s unit in Prague. The trigger for a potential rate hike could come if higher energy costs gradually filter into broader prices in the coming months, said Martin Komrska, chief economist for UniCredit Bank Czech Republic and Slovakia.

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“But we don’t expect a majority support for monetary-policy tightening to emerge in the bank board earlier than in autumn,” he said.

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Several policymakers have said that rate increase appeared to be the more likely next change in policy. But they have stressed there is no need to rush because below-target inflation early in the year and a relatively tight monetary stance before the Iran conflict provided a cushion to absorb the immediate supply shock from higher energy costs.

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Market expectations shifted immediately to bets on monetary tightening following the start of the Iran war, with forward rate agreements now signaling around three quarter-point rate hikes within a year. 

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Highly volatile food prices continued to dampen headline inflation last month, although some central bankers said an expected jump in agriculture costs was likely to reverse this later in the year.

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All analysts in a Bloomberg survey expect the Czech National Bank board to hold the benchmark interest rate at 3.5% for an eight meeting when it meets Thursday.  

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