Czech Republic’s strong acceleration in November CPI may impact policy decisions, says Commerzbank

Czech Republic’s consumer price inflation surprised to the upside in November, accelerating to 1.5 percent year-on-year from 0.8 percent year-on-year recorded in October. Consensus expectations were for a reading of 1.3 percent, while the central bank’s forecast was for a reading of 1 percent. The November print is the first 1 percent plus reading since 2013 and is quite close to the central bank’s 2 percent inflation target.

However, the November reading has to be interpreted carefully. Firstly, there were base impacts at play for the November reading – the sequential rise in prices came in at 0.3 percent, the same as in October. This is a rapid rate of increase; however, there was no special acceleration in November other than the commodity price driven upswing that was seen in the past quarter.

Secondly, the total upward surprise compared with the central bank forecast came from the volatile food, transport and alcohol prices. Food alone contributed 0.5 percentage points of the 1.5 percent headline inflation pace. While other categories other than food, transport and alcohol did not show upward tendency, the print is still expected to provide confidence to the Czech National Bank board that inflation is following its projections and will reach 2 percent sustainably by the first half of 2017.

This suggests that the central bank will actually roll back its foreign exchange cap on schedule soon after mid-2017, rather than extend its timeframe as was anticipated, said Commerzbank in a research report.

“We still hold on to our view that core inflation trends around Eurozone will remain tepid through 2017 and only accelerate so mildly that central banks will not feel comfortable removing monetary accommodation (in this case via the weak CZK) – but, after this CPI reading, the risk to our view definitely increases”, added Commerzbank.