Czech Policymaker Cautions on Services Prices as Inflation Slows

sgqhaq92q6i(8mf7f809lu)c_media_dl_1.png Czech Statistics Office, Czech N

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(Bloomberg) — A Czech central banker signaled that tight monetary policy remains appropriate even after headline inflation slowed more than expected last month in the wake of the first interest-rate hike in four years.

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Consumer prices in June rose 1.5% from a year earlier, according to a flash estimate from the statistics office on Tuesday. The figure was below the 1.8% median estimate in a Bloomberg survey and also trailed the central bank’s 2.1% forecast for the month. 

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Officials in the Czech Republic delivered on expectations of monetary tightening last month as they focused on domestic risks, including sticky core inflation. The easing of headline price growth in June was primarily driven by volatile items, such as food and energy, but services costs are still rising by an annual 4.5%, according to Jakub Seidler, a Czech National Bank board member. 

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“The setting of monetary policy by the CNB reflects both the still elevated growth of service prices and the inflation forecast over the monetary policy horizon,” Seidler said in a post on X.

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Prices dropped by 0.3% on a monthly basis, according to the data from the statistics office. 

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The koruna weakened as much as 0.3% against the euro after the data, before paring some of the losses and trading at 24.214 to the single currency as of 10:50 a.m. in Prague. 

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Investors trimmed bets on another rate hike after policymakers insisted the June move wasn’t the start of a tightening cycle, with money market prices signaling expectations of around 15 basis points of tightening by the end of the year.

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Still, while officially targeting the headline inflation figure, central bankers are more closely following the core price measure, which is adjusted for volatile items like food and fuels. The central bank will publish the core reading, which tracks underlying demand pressures in the economy, on Friday.

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The bank lifted the benchmark interest rate by 25 basis points to 3.75% in June, the first rate hike in four years, with board members saying they needed to adjust the degree of policy restriction.

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Food and energy costs will no longer have a dampening effect on inflation in the 12-18 month outlook, where the bank sees year-on-year price dynamics at the upper boundary of the 1%-3% tolerance band, Seidler said. 

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The drop in the headline rate below the official 2% goal is unlikely to trigger a major shift in the monetary policy course, according to Martin Komrska, chief economist at UniCredit SpA’s unit in Prague. 

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“The recent increase in interest rates was a reaction to persistent price pressure in core inflation items, and they haven’t shown a significant improvement yet,” he said. “The central bank isn’t under pressure to change rates in either direction anytime soon.”  

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(Recasts with central banker’s comments starting in the first paragraph.)

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