MNI CNB WATCH: Czech National Bank To End Year At 3.5%

The Czech National Bank is expected to leave its policy rate unchanged at 3.5% when it meets this week, with November’s better-than-expected fall in inflation to 2.1% not enough to offset 2.6% core price growth. (See MNI EM CNB WATCH: CNB Holds Policy Rate At 3.5% As Expected)

Food, alcohol and tobacco prices pushed headline inflation up 0.2% to 2.5% in October, but their subsequent retracement means December inflation could come in marginally below the CNB’s projection of 2.3%. (See MNI EM INTERVIEW: CNB Likely Done At 3.5% - Ex-Governor Singer)

The pace of price growth is likely to slow again in Q1, with the promise of lower energy bills - a combination of falling wholesale prices and government subsidies, coupled with a strong koruna  - potentially pushing it below the 2% target rate.

However, policymakers will be wary of jumping the gun with cuts, with solid GDP growth next year and strong consumer sentiment despite recent labour market loosening set to keep upward price pressure - particularly from services - in play next year.

Commenting on the data, CNB Director of the Macroeconomic Forecasting Jakub Mateju noted that while the decline in inflation was welcome it is driven by volatile items of the consumer basket, and could be followed by “a surprise in the opposite direction.”

“It is therefore important that inflation also subsides permanently in sectors where it is persistently elevated, especially in services,” he added. (See MNI EM INTERVIEW: Czech Nat'l Bank Risks Lagging Prices Bounce)

Bank Board member Jan Kubicek said in an interview that “in terms of probability for the next step, I see a rate hike as more likely than a cut, but I can’t yet predict the timeframe for when it might happen.”

The potential pro-inflationary impact of the new government’s expansionary fiscal policy may also add to concerns expressed repeatedly by Governor Ales Michl. But, as former CNB Deputy Governor Tomas Holub told MNI, communications may be complicated by Michl’s former role as an adviser to Andrej Babis, who was installed as prime minister last week. (See MNI EM INTERVIEW2: CNB Should Ignore Brief Inflation Dip - Holub)

Deputy Governor Eva Zamrazilova is scheduled not to participate in Thursday’s deliberations, but her absence is unlikely to affect the result: a hold in the 2W repo rate at 3.5%, with any softening of the established hawkish tone especially noteworthy given new macroeconomic projections are not due until February. 

The CNB is unlikely, however, to shift far from its belief that given increasing credit growth, elevated wage growth and strong core inflation inflation will remain slightly above 2% until the end of next year.