Czech Inflation Exceeds Expectations, Complicating Central Bank’s Easing Plans

Czech inflation unexpectedly accelerated in August, putting the central bank in a challenging position as it weighs further monetary easing, Bloomberg reports.

Consumer prices rose 2.2% year-on-year, matching the previous month’s growth, according to data released by the Czech Statistical Office on Tuesday. This reading surpassed both the median estimate in a Bloomberg survey and the central bank’s own forecast for the month.

The Czech koruna strengthened against the euro following the release of the data, reversing earlier losses.

The Czech economy has been struggling to recover from two years of economic stagnation and shrinking real wages. While inflation has been hovering near the official 2% target this year due to cheaper food and fuel prices, the cost of services continues to rise.

The central bank, which has already cut rates by a cumulative 250 basis points since December, faces a delicate balancing act. Policymakers will need to consider the sluggish economic recovery against persistent price pressures in the services sector at their next monetary meeting on September 25.

The Czech National Bank’s latest forecast suggests that the benchmark rate will remain at the current level of 4.5% for the rest of the year. However, money market prices indicate expectations for another 75 basis points of easing in the upcoming three meetings.

Later today, the central bank will release data on core inflation, a measure of underlying domestic price pressures that is closely watched by policymakers.

Since the previous policy meeting in early August, Governor Ales Michl has emphasized the need for prolonged elevated borrowing costs to prevent a resurgence of inflation, which peaked at 18% in 2022.

“Demand-driven price growth may be more persistent and require higher rates than over the past decade,” Michl wrote in a statement following his trip to the Jackson Hole gathering of global policymakers and academics.