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(Bloomberg) — The Czech central bank said monetary policy caution remains warranted, with the headline inflation rate likely to return to or “slightly above” the 2% target this year following a recent drop.
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Policymakers defied pressure last month from Prime Minister Andrej Babis for lower borrowing costs by raising the key rate for the first time in four years to curb domestic inflation pressures.
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While headline price growth slowed to 1.5% in June, the move was due to volatile items, “whose future evolution cannot be relied upon,” according to Petr Sklenar, the central bank’s chief economist.
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“By contrast, the elevated core inflation and the increase in global inflation pressures are still reasons for increased caution,” Sklenar said in a statement Friday after the statistics service released the final inflation reading for June.
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The core inflation gauge, which excludes the volatile prices and reflects underlying demand-driven pressures, dropped by 0.1 percentage point to 2.8% in June after staying at 2.9% for three months, the central bank said.
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Although the latest inflation number looks very good on the surface, the structure is uneven, according to Deputy Governor Eva Zamrazilova. Food and energy costs helped lower the headline figure but services inflation remains “very persistent,” she said in a video interview posted on Aktualne.cz earlier on Friday.
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Robust consumer demand is driven by an “extreme revival” in wage growth, which allow services providers to continue increasing prices, the policymaker said.
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“We are concerned about consumer demand being so strong that it’s fueling core inflation, especially in services,” Zamrazilova said. “The overall picture shows clear demand-driven pressures on inflation in the future.”
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