Czech CPI spike to 5% boosts crown, rate hike bets

Consumer prices rose 0.9 percent in November from October according to the statistics bureau, more than double the market forecast of 0.4 percent.

The annual inflation rate rose to its highest since August 2001 from 4.0 percent a month earlier, exceeding both the 4.5 percent market forecast and the 3.6-4.2 percent projection by the central bank (CNB).

‘Inflation is blowing up,’ said Miroslav Plojhar, economist at JP Morgan in London.

The upside surprise came on the back of a 4.0 percent monthly surge in food prices, their sharpest gain in nearly 15 years. Fuel prices went up 2.9 percent month-on-month.

CNB policymakers raised the main rate by 25 basis points to a 5-1/2-year high of 3.50 percent CZCBIRECI in November on concern that buoyant demand makes it easier for retailers and producers to pass the food and energy price rise onto consumers.

‘The CNB board must be relieved that it did raise rates at the last meeting, but will obviously be concerned about how this figure will be perceived by the market and the effect it will have on inflation expectations,’ said Lauren Van Biljon, analyst at 4Cast consultancy in London.

Analysts said inflation pressure coming from food prices was a global phenomenon and beyond a national central bank’s control, but the risk of rising shop prices spilling over into inflation and wage expectations warranted a further rate hike.

‘At the moment it is too early to raise interest rates again, but in any case monetary policy cannot do without further tightening,’ said David Marek, chief economist at Patria Finance, who forecast another rate hike in the first quarter.

Most analysts agreed the CNB could wait with more tightening until early next year because the firm crown helps tame inflation pressures by offsetting a rise in commodity and other import prices.

The crown traded stronger than 26.0 per euro for the first time ever on Monday, firming half a percent on the day to an all-time high of 25.960 per euro EURCZK by 0955 GMT. Forward Money market rates CZKFRA jumped as much as 10 basis points.

Czech rates have risen from an all-time low of 1.75 percent in October 2005, and minutes of the CNB’s November policy meeting on Friday showed the latest increase was a pre-emptive strike against a possible increase in inflation expectations.

Further increases in electricity, gas and other energy costs as well as a tax increase and the introduction of healthcare fees are expected to boost inflation 6 percent early next year.

That would push the rate well above the CNB’s comfort zone of 1 percentage point either side of a 3 percent target.