Czech Inflation Unexpectedly Quickens, Misses Central Bank Mark

  • Policy makers debating later exit from their monetary stimulus
  • Annual inflation accelerates for first time in three months

Czech inflation unexpectedly accelerated for the first time in three months, missing the central bank’s forecast and sharpening its dilemma about whether the current monetary stimulus is enough to lift price growth to target.

The inflation rate increased to 0.4 percent in September from a year earlier, compared with a 0.3 percent gain in the previous month, the Czech Statistics Office said on Friday. Prices fell 0.2 percent on a monthly basis, matching August’s decline. The median estimates in a Bloomberg survey were for a 0.3 percent annual increase and a monthly drop of 0.3 percent. The central bank forecast inflation at 0.6 percent from a year earlier.

Price growth remains deep below the 2 percent target despite the country’s fastest economic growth in eight years, confounding policy makers who’ve set a cap on koruna gains against the euro in 2013 and pledged to keep the regime in place at least until the middle of next year. The central bank sees disinflationary risks persisting in the “next few quarters” as a result of low commodities prices and more subdued global inflation, Governor Miroslav Singer said on Sept. 24.

“Low inflation and the outlook for price developments in the Czech economy are suggesting that the central bank could keep its foreign-exchange commitment in place until the end of 2016, which means that its duration may be prolonged,” Radomir Jac, chief economist in Prague at Generali Investments CEE, said in an e-mailed note. “In any case, it’s difficult to find convincing reasons why the central bank should cancel the foreign-exchange commitment earlier, meaning before the middle of 2016.”

With the main interest rate at what the central bank calls a “technical zero” of 0.05 percent, policy makers intervened to defend the currency limit of around 27 per euro in July for the first time since introducing it almost two years ago. The bank bought foreign exchange worth 3.7 billion euros ($4.2 billion) in August after purchasing 1 billion euros a month earlier, it said on Wednesday.

The koruna, the second-best performer in developing Europe in the past six months, traded little changed at 27.122 versus the euro as of 9:52 a.m. in Prague. The yield on the government’s 10-year bonds dropped one basis point to 0.61 percent, close to parity with comparable German bunds.

Prices of alcoholic beverages and tobacco had the biggest impact on annual inflation in September, according to the statistics office. Utility costs, including water and electricity prices, were another major contributing factor, it said.

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