Czech Stimulus Seen Unaffected by Inflation Jump in May

The first acceleration in Czech inflation (CZCPYOY) this year is unlikely to prompt the central bank to bring forward the end of its monetary stimulus as consumer demand remains subdued, analysts said.

Inflation reached 0.4 percent from a year earlier in May, compared with 0.1 percent in April, the Czech Statistics Office said in a statement today. That matched the median estimate in a Bloomberg survey and was below the central bank’s forecast of 0.6 percent. Prices (CZCPMOM) increased 0.1 percent on a monthly basis after stagnating in April.

The central bank in Prague is assessing the strength of economic recovery for its inflation outlook after deploying non-standard policy easing by weakening the koruna and setting a limit on the currency’s gains. Rate setters see an increasing likelihood that inflation won’t accelerate enough before early next year to warrant a shift to monetary tightening.

“The key is inflation pressures that would stem from stronger domestic demand and from the labor market,” Jiri Skop, an economist at Komercni Banka AS in Prague, said by e-mail. “Even with reviving consumption, demand pressures won’t appear this year. The same goes for wage growth, which will remain low this year.”

The biggest “upward effect” on annual inflation came from food and non-alcoholic beverages, with costs in that category rising 2.5 percent from May 2013, the statistics office said.

‘Technical Zero’

The Ceska Narodni Banka left the benchmark interest rate at what it calls a “technical zero” of 0.05 percent for a 12th meeting on May 7. It also reaffirmed a commitment not to let the koruna “strengthen too much” beyond 27 per euro, a limit on the currency pair set on Nov. 7. The bank will hold the next policy meeting on June 26.

The Czech monetary authority followed in the footsteps of the U.S. Federal Reserve and the Bank of Japan in trying to reflate the economy to spur a revival from a record-long recession. Czech policy makers intervened to weaken the koruna in November and have said there’s a rising chance they may maintain the limit on currency gains beyond February 2015.

The koruna has weakened 6.2 percent against the euro since its pre-intervention level on Nov. 6, more than its central European peers like the Hungarian forint. The Czech currency was little changed at 27.451 per euro as of 11:52 a.m. in Prague.

An economic recovery and koruna weakness still aren’t having a more significant effect on inflation, according to Patrik Rozumbersky, an analyst at UniCredit Bank Czech Republic AS.

“May inflation data probably won’t change the central bank’s communication of pushing the end of the intervention regime beyond the first quarter of 2015,” Rozumbersky said by e-mail.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Andrea Dudik

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