Czech Inflation Accelerates to New 13-Year High

Czech inflation accelerated to a fresh 13-year high in November, and while the acceleration was less pronounced than in the past four months, the central bank seemed likely to continue with policy tightening.

Inflation in central Europe’s economies is running hotter than many European peers with external factors like supply problems and rising energy costs mixing with domestic drivers such as tight labour markets and strong wage growth.

Central banks around the region have reacted with sharp rate rises, with Czech policymakers among the most aggressive, having delivered 200 basis points in hikes since September.

Czech inflation data on Friday showed the headline rate rose to 6.0%, the highest level since October 2008. However, the growth from the previous month’s reading – 0.2 percentage points – slowed down after four months of steady acceleration.

Analysts see the central bank raising interest rates further, in line with its outlook, as they point to the government’s waiver on value-added tax on energy as a factor preventing inflation from rising much stronger in November.

“Inflation is more than 1 percentage point above the central bank’s forecast. The crown’s reluctance to strengthen also speaks in favour of monetary policy tightening,” Komercni Banka analyst Michal Brozka said.

He expects a 50 basis-points hike to the main Czech repo rate (CZCBIR=ECI) which sits at 2.75% now and is seen rising further as inflation is only set to peak early next year.

However, like other rate setters around the world, the Czech central bank may turn more cautious with new risks from the COVID-19 pandemic appearing.

Czech markets scaled back rate hike expectations sharply in late November when central bank Governor Jiri Rusnok told Reuters the bank could moderate its tightening pace and even possibly consider a pause in December.

Markets see chances of a 25 basis point hike, or possibly 50 bps, when the Czech bank next meets on Dec. 22. That is down from previous expectations of a 75 bps rate rise.