Unexpected Inflation Slowdown Bolsters Czech Koruna Cap Case

Czech inflation unexpectedly slowed in November, adding to arguments for the central bank to delay the exit from its policy mix of near-zero rates and a limit on koruna gains.

Consumer prices rose 0.1 percent from a year earlier, the slowest pace in nine months, the statistics office said in a statement on Wednesday. The reading compares with the median analyst estimate for a 0.4 percent increase and the central bank’s projection for 0.6 percent inflation in November.

Czech economic growth, one of Europe’s fastest, is failing to lift inflation toward the central bank’s 2 percent target because of cheaper food and lower energy costs. Policy makers last month said that slower price growth means their intervention policy, preventing the koruna from gaining beyond about 27 per euro, would probably be extended until around the end of next year.

“The inflation data should solidify the CNB’s view that the current monetary-policy regime, including the pledge to keep the koruna above 27 per euro, will remain in place for the entire year 2016,” Radomir Jac, chief economist at Generali Investments CEE AS in Prague, said by e-mail. “In my opinion, the CNB will only scrap the commitment in the spring of 2017.”

November prices fell 0.4 percent from the previous month, the biggest decline in more than two years, the statistics office said. The median analyst estimate was for a 0.1 percent contraction.

The central bank bank introduced the cap on koruna gains two years ago after cutting the benchmark interest rate to 0.05 percent failed to fend off deflation risks. The Czech currency traded little changed at 27.02 per euro as of 9:59 a.m. in Prague.

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