Czech Inflation Slows, Weakening Case for an Imminent Rate Hike

6p6m63qd7rlgi9pt4{9bt4pu_media_dl_1.png Czech Statistics Office, Czech N

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(Bloomberg) — Czech inflation slowed more than expected, bolstering arguments against an imminent interest rate hike as policymakers gauge the Iran conflict’s broader impact on the economy.

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Consumer prices rose 2.1% from a year earlier in May, according to a flash estimate from the statistics office on Thursday. The headline figure was below the 2.3% median estimate in a Bloomberg survey and matched the central bank’s projection for the month. The closely watched services price growth slowed to 4.7% but remained at levels that policymakers have called elevated. 

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The Czech National Bank left the benchmark at 3.5% last month, saying that rates are still “moderately restrictive.” The board said it won’t react to the primary impact of higher energy costs but will closely watch out for a potential spillover into other prices. Governor Ales Michl has said the bank “won’t be afraid to raise rates” if there is a risk that inflation adjusted for energy will accelerate.

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While the most recent inflation slowdown is “positive news,” price growth is likely to move in the upper half of the 1%-3% tolerance range in the coming months because of the impact of higher energy prices, according to Petr Dufek, chief economist at Banka Creditas in Prague.

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“Therefore the CNB will remain cautions and maintain the option of raising interest rates open,” Dufek said. 

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Central bankers have said that the domestic economy and monetary policy were in a favorable starting position when the Iran war broke out, giving them time to assess the situation without rushing with a reaction. 

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While highly volatile food prices continued to dampen headline inflation last month, the central bank has said that this trend was likely to reverse later in the year.

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A central bank survey in May showed that most economists expected no rate change within one year, although the number of analysts predicting a hike in that period has increased.

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The market started betting on monetary tightening after the Middle East conflict erupted. Forward rate agreements now indicate expectations of around three quarter-point hikes over the next 12 months. Some investors expected the first hike as early as at the June 18 meeting, although they pared such bets after the latest inflation reading. 

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The koruna also dropped slightly after the data were published, trading 0.1% weaker against the euro as of 9:45 a.m. in Prague. 

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