Czech Price Growth at Five-Year High Boosts Rate-Hike Case

  • Central bankers voted against rate increase in September
  • Strong koruna is cooling economy but rate rise seen imminent

Czech consumer prices rose the fastest in five years in September, supporting the case for higher interest rates as economic growth accelerates and workers demand a bump in pay.

Inflation quickened to 2.7 percent from a year earlier, driven mainly by food prices, from 2.5 percent in August, the Czech Statistics Office said on Monday. The reading was in line with the median estimate of 17 analysts in a Bloomberg survey and matched the central bank’s own forecast for the month. Consumer prices dropped 0.1 percent on a monthly basis, the same as in August.

The reading comes just over a week after Czech central bankers voted by a razor-thin majority to pause monetary tightening following Europe’s first rate hike this year. The bank signaled borrowing costs will rise and that board members are trying to gauge the right time to respond to inflation risks stemming from faster-than-expected economic growth and an employee shortage.

“Another interest-rate increase is imminent,” Patrik Rozumbersky, an analyst at the Czech unit of UniCredit SpA, said in a note. “It would be a surprise if the CNB didn’t raise rates next month. It could possibly be delayed only by sharp koruna appreciation.”

While the stronger koruna, whose 2.8 percent gain in the past six months beat all other major currencies tracked by Bloomberg, is cooling the economy, the central bank still sees large positions built by speculative investors that are slowing the appreciation trend.

Rate setters will debate new economic forecasts at their Nov. 2 meeting. Some argued in September that it was better to wait with the rate hike until after the European Central Bank announces its strategy to end its quantitative easing program this month, according to minutes published Friday. Others saw ECB policy having a diminished impact because of the “overbought” koruna.

The Czech currency settled at levels stronger than 26 per euro for the first time since the central bank raised rates, trading 0.1 percent stronger at 25.886 per euro as of 9:38 a.m. in Prague. It has appreciated 4.6 percent since April 6, when the central bank ended its policy of holding the exchange rate weaker than 27 against the euro to reflate the economy.

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