Czech July Inflation Jump May Not Spark Rate Increase

A jump in the Czech inflation rate to the highest in 16 months may not prompt monetary policy makers to raise interest rates as price growth remains under their 2 percent target, Patria Finance and UniCredit SpA said.

The annual rate last month was 1.9 percent, the highest since March 2009, compared with 1.2 percent in June, the statistics office in Prague said on its website today, matching the median estimate of 10 economists surveyed by Bloomberg. On the month, consumer prices rose 0.3 percent. The central bank forecast annual inflation of 2 percent for July.

Price growth has accelerated this year as demand for Czech exports, such as Skoda Auto AS cars, helps the economy recover from the worst recession since the end of communism two decades ago. The central bank has kept the benchmark rate at a record- low 0.75 percent since May and policy makers may refrain from immediately reacting to the pickup in inflation, said David Marek, chief economist at Patria in Prague.

“There is no pressure to change monetary policy immediately” and the central bank “can hold rates stable until the third quarter of 2011,” he said in a note to clients. “Inflation is likely to remain at a relatively safe level next year as fiscal consolidation will hamper domestic demand.”

‘Negligible’ Deviation

The central bank said inflation deviation from its forecast was “negligible” in July. The Prague-based Ceska Narodni Banka expects headline price growth to accelerate further in the third quarter, driven by increases in state-regulated prices and food costs. Inflation pressures from the domestic economy will remain “subdued,” the bank said in a statement on its website.

The koruna strengthened 0.4 percent to 24.777 against the euro as of 1:40 p.m. in Prague. It is the world’s eighth-best performing currency in the past three months, having gained 3.6 percent.

Gross domestic product rose an annual 1.1 percent in the first three months, the first increase in five quarters, adding to consumer-price pressure. Inflation is also driven by an increase in the excise tax on tobacco products from the beginning of 2010.

The July rate was influenced by a 3.3 percent increase in the cost of food and non-alcoholic beverages and a 2.2 percent rise in the category of housing, water, energy and fuel, the statistics office said. Alcoholic beverages and tobacco also added to overall price growth, rising 5.7 percent on the year.

Inflation Forecast

The central bank left the benchmark two-week repurchase rate at 0.75 percent on Aug. 5 and signaled borrowing costs may stay stable until the middle of next year. It forecasts inflation below the 2 percent target in the third and fourth quarters of next year.

Food prices risk pushing the inflation rate “significantly” above the central bank’s target as a grain shortage may drive up costs, said Patrik Rozumbersky, an economist at the Czech unit of UniCredit in Prague. Still, policy makers will probably wait to evaluate longer-term effects before reacting with a rate increase, he said.

“We don’t expect the central bank to change interest rates in the coming two or three quarters,” Rozumbersky said. “The central bank traditionally doesn’t react to fluctuations in food prices with monetary policy changes.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE