Czech inflation begins its climb to the top
The desk views rising Czech inflation, now at 2.5% year-over-year as of September, as a significant trigger for interest rate adjustments by the Czech National Bank (CNB). Elevated energy prices, particularly from fuel and regulated prices, are influencing this inflationary trend, prompting discussions around potential hikes in the upcoming November meeting. Per the full note from ING, a hike seems increasingly likely as the market adjusts to these emerging inflationary pressures, particularly driven by second-round effects from interruptive geopolitical events, including the conflict around the Strait of Hormuz.
What the desk is arguing
The desk believes that the current inflation trajectory in the Czech Republic is likely to lead to an adjustment in monetary policy soon. Per the full note from ING, the recent spike in inflation to 2.5% year-on-year is primarily due to the ongoing rise in regulated prices and fuel costs. This development, along with a slight uptick in services price growth, suggests that the CNB may have to make a preemptive interest rate hike to counteract these pressures.
Moreover, the energy sector's adjustments underscore a transition in the inflationary landscape, with regulated prices playing a crucial role in shaping consumer prices. Notably, services prices incrementally rose by 0.1 percentage point to 4.6% YoY, indicating deviations from the CNB's medium-term price stability goals.
Evidently, food prices have not yet contributed significantly to the inflation rise, but a subtle uptick in unprocessed food prices may signal the start of potential increases in this category as well, reflecting broader supply chain disruptions.
Where it sits in our coverage
Our consensus target for the CZK/EUR exchange rate sits at 1.075, with a range spanning 1.04 to 1.12. Notable firm targets include:
The desk's perspective aligns closely with the views expressed by jpmorgan, which anticipates a stronger koruna amidst inflationary pressures, contrasting with bofa's more cautious outlook at the lower end of our target range. Given this positioning, the desk's view is moderately optimistic about the CZK outlook.
How other firms see it
A group of firms, including jpmorgan and ubs, share a similar view regarding the tightening of monetary policy in response to the inflation concerns. In contrast, firms like bofa and hsbc have expressed a more restrained stance, positioning for potential currency weakness due to global market dynamics.
Traders should also keep an eye on the CZK's fluctuations against the EUR, as well as central bank communications from the CNB, since each can reflect broader economic sentiments and policy adjustments that could influence the currency's path going forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Czech inflation hit 2.5% in September, driven by higher fuel and regulated prices.
- 02The CNB may respond with interest rate hikes to stabilize pressure from rising inflation.
- 03Food prices are expected to join the inflationary trajectory soon due to supply chain disruptions.
- 04Current inflation print aligns with ING’s forecasting, boosting confidence in a November rate hike.
Market implications
Watch for a potential upward shift in the CZK against the EUR, particularly should the CNB signal a rate hike at the next meeting. Key levels to monitor include the area around 1.075, which marks our consensus target.
Risks to this view
Should geopolitical tensions ease or if there is a significant drop in energy prices, inflation may stabilize faster than expected, leading the CNB to reconsider the urgency of a rate hike. Additionally, if food prices remain subdued longer than anticipated, the inflation outlook could shift.
Articles Czech inflation begins its climb to the top Published 13:58 Czech Republic Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Inflation increased to 2.5% in September, fostered by fuel prices and a persistently elevated core rate. The print suggests a tangible monthly gain in regulated prices, as energy distributors start to lift end prices, while pricing remained benign in the food segment. A hike in November seems increasingly likely, as rates adjust to a new equilibrium David Havrlant Higher regulated energy prices in September is starting to feed into inflation Second-round effects start to materialise Czech headline inflation increased to 2.5% year-on-year in September, while the price level remained unchanged from the previous month.
Both readings came in 0.1ppt above the market consensus, yet in line with our forecast. In a monthly comparison, the limited breakdown suggests a punchy increase in fuel prices but also tangible gains in regulated prices. The energy distributors are just beginning to pass through the persistently elevated prices of the underlying assets, such as oil and natural gas, into the end prices for their customers.
In contrast, food prices remained on the benign side in September, though a tiny price increase in unprocessed foodstuffs likely heralds an expected turnaround over the coming months. We see the upcoming return of food price growth along with the current price gains in regulated prices as the first tangible second-round effects linked to the Strait of Hormuz conflict. Expensive inputs and weaker koruna to drive goods prices higher Source: CNB, ING, Macrobond "> Source: CNB, ING, Macrobond Services price growth picked up by 0.1ppt to 4.6% YoY in September, which is not compatible with medium-term price stability.
Meanwhile, goods prices recorded a visible monthly increase in September that resulted in 1.2% annual growth, up from 0.2% previously. For sure, September’s rising Brent Crude prices and refined products took its toll, while the weakening koruna went in the same direction. That said, we should see a more pronounced FX impact on CPI in October, as there is a time lag for import prices to trickle down to consumer price tags, while the USD continued to gain strength.
We estimate that annual core inflation landed at around 3.1% in September. Import prices dynamics precedes core inflation Source: CZSO, CNB, Macrobond "> Source: CZSO, CNB, Macrobond With all this crunching, an interest rate hike in November seems inevitable. In any case, we reiterate our stance that this is not the onset of a genuine hiking cycle, when monetary policy is reacting to the vision of an overheating economy and excessive domestic demand.
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