Czech Inflation Slows More Than Expected in May

Czech inflation slowed more than expected in May, to a headline rate of 2.6% year-on-year following a surprise jump to the top end of the central bank’s tolerance band in the previous month, likely keeping the path clear for further interest rate cuts.

Year-on-year inflation eased from 2.9% recorded in April and was below a Reuters poll forecast of 2.8%. The lower-than-expected figure weighed on the crown, which eased past 24.70 per euro for the first time in a week.

On a monthly basis, consumer prices were flat.

Following the previous inflation surprise and after data in recent weeks showing a building recovery in consumer demand and real wage growth, markets have scaled back bets on the pace of Czech National Bank (CNB) rate cuts this year.

The bank, which targets inflation at 2% with a tolerance band of 1 percentage point above or below that, has cut its key two-week repo rate by 175 basis points to 5.25% since December, including cuts of 50 basis points each at the past three meetings.

Many analysts say the bank is likely to slow that easing pace to 25 basis points when it meets again on June 27.

“The CNB will likely cut interest rates at its June meeting, but it should take a smaller step given inflation and especially news of strong demand or wage growth,” Creditas Banka chief economist Petr Dufek said.

“Fifty-basis-point steps should be replaced by 25-basis-point ones.”

Central bankers have been most cautious on services sector prices, which statistics office data showed rose more than 5% year-on-year again in May.

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