Czech Inflation Slows as Policy Makers Ponder Stimulus Span

  • Price growth key for timing of scrapping currency cap
  • August inflation slowdown driven by fuel, food prices

Czech inflation slowed for a second month in August as falling commodity prices continued to hamper the central bank’s efforts to lift price growth with non-conventional tools.

The inflation rate dropped to 0.3 percent, from 0.5 percent in July, the Czech Statistics Office said Wednesday. Prices fell 0.2 percent on a monthly basis, compared with a 0.1 percent decline in July. The median estimate in a Bloomberg survey was for a 0.4 percent annual price increase and a 0.2 percent monthly drop, and the central bank saw August inflation at 0.7 percent.

Policy makers in Prague are debating how long they will need to keep stimulating the economy with a regime that caps currency gains because the fastest pace of gross domestic product growth in seven years is failing to spur price growth. The bank has pledged to keep a lid on the koruna until at least July, with some rate setters suggesting that loose policy may need to stay in place beyond 2016.

“Even as the Czech economy is reporting great statistics on GDP growth, rising household consumption and labor market trends, the data are also confirming absence of inflationary pressures,” Radomír Jac, the chief economist at Generali Investments CEE, said in a note. The latest figures will “strengthen the central bank’s view about the need to maintain the foreign-exchange commitment” at least until the second half of next year, Jac said.

With the main interest rate at what the central bank calls a “technical zero” of 0.05 percent, the Czech National Bank intervened to defend the currency limit of around 27 per euro in July for the first time since introducing it in 2013. The bank bought foreign exchange worth 1.03 billion euro ($1.2 billion), while August reserves data signaled an even larger intervention volume was needed a month later.

Loose Policy

The bank may need to stick to loose monetary policy beyond next year as price growth remains below target and global economic trends pose downside risks to the inflation outlook, Vice Governor Vladimir Tomsik said on Sept. 2. While the Czech economy grew 4.4 percent in the second quarter compared with a year earlier, an economic slowdown in China and other emerging markets may combine with falling commodity prices to create disinflationary risks, he said.

The koruna was little changed at 27.058 to the euro as of 9.45 a.m. in Prague. It has appreciated 2.2 percent against the common currency this year, outperforming its regional peers, the Polish zloty and Hungarian forint.

“Consumer prices are growing at a slower pace compared with the central bank’s forecast, which could push the koruna at least slightly” to weaker levels, Jana Steckerova, an analyst at Komercni Banka AS in Prague, said in a note before the data were published.

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