MNI INTERVIEW: CNB Holds In June, Cuts In Sept - Ex-Gov Singer

The Czech National Bank is likely to keep rates unchanged later this month, with May's upside inflation surprise strengthening the case for delaying further cuts until September, former governor Miroslav Singer told MNI.

With April CPI inflation at 1.8%, the CNB’s Bank Board voted by a margin of 6-1 last month to lower the two-week repo rate by 25bps to 3.5%. But with average annual inflation seen slightly above target at 2.5%, the Board said monetary policy will need to remain “relatively tight” this year.  (See MNI EM CNB WATCH: Hawkish 25Bps Cut Confirms Expectations)

That approach would appear to have been justified - at least in the near-term - by May’s pick-up to 2.4% inflation, Singer said.

“They will do nothing in June, but May’s negative inflation surprise only serves to emphasise the importance of moving in a data-dependent, meeting-by-meeting fashion,” he said.

“I would expect the Bank Board to wait until the data for June, July and August is in, which they can afford to do. That means September is likely to be the first month when they will actively consider a cut.”

But Singer also cautioned against placing too much weight on the likelihood that some of the main drivers behind May’s inflation will extend much beyond the next couple of months.

RISKS BROADLY BALANCED

“We did see some faster-than-expected increases in the price of food, beverages and tobacco in May. I suspect this reflects the fact that Czechs’ wages have increased in real terms, and so producers and retailers are trying to take advantage of that fact. However, I don’t see that persisting.”

While Inflationary pressures persist in services - as highlighted in a recent interview with Board member Jan Prochazka - May’s fall in producer prices, which dipped 0.6% month-on-month and 0.8% year-on-year, points to further moderation in core inflation, Singer said.

“This should settle down the hawks in the Board a bit.”

Headline inflation will average around 2.2% this year - close to or somewhat below the CNB’s forecast - with interest rates setting in the region of 3.25%, Singer said, with domestic risks to the outlook broadly balanced.

While it remains to be seen what happens in the Middle East, Singer was optimistic that the downward trend in Czech inflation dynamic will be relatively unaffected by possible oil price rises.

“It may well be the case that Iran either does not have the capability to close the Straits of Hormuz, or, if they do, that they are dissuaded from doing so. Nor does Iran supply sufficient oil for it to be a major upside risk to European inflation,” he said.

“Though, again, we will have to take it month-by-month. Either way, I would expect the CNB to maintain its current hawkish tone in communications.”