Czech Inflation Slows, Seen Leaving Koruna Cap Plan Intact

Czech price growth slowed to a five-month low in May, although healthy domestic demand and accelerating wage growth made it unlikely that the central bank will introduce more monetary easing.

Falling costs of natural gas and food reined in inflation, which slowed to 0.1 percent in May from an annual rate of 0.6 percent a month earlier, the Czech Statistics Office said on Thursday. While the reading missed the median estimate of 18 analysts for rate of 0.4 percent, it matched the central bank’s own forecast.

The Czech National Bank, which discounts the primary effects of energy and food prices in its policy considerations, is using near-zero interest rates and a limit on koruna gains to spur inflation toward its 2 percent target. The May slowdown will be reversed later this year, and it contrasts with the country’s falling jobless rate and faster-than-expected growth in wages and retail sales, according to Radomir Jac, chief economist at Generali Investments CEE in Prague.

“Low inflation isn’t negatively affecting the behavior of Czech economic actors, and definitely isn’t hampering consumption,” Jac said by e-mail. “The CNB therefore doesn’t have to react to low inflation by further relaxing its monetary policy.”

Central Bank board member Jiri Rusnok, who will become governor on July 1, said last week rate setters were “very unlikely” to weaken the koruna cap from the current level around 27 per euro. Outgoing Governor Miroslav Singer said three days ago that economic data support the central bank’s expectation that it will scrap the weak-currency regime around the middle of 2017.

“The question of shifting the exchange-rate commitment to a weaker level will remain within the realm of theoretical debates,” Jac wrote. “The effects of low inflation on the Czech economy and the condition of the economy as a whole aren’t forcing the central bank to take that step.”

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