Czech Republic Inflation

Czech Republic

Inflation moderates in January

In January, consumer prices rose 0.69% over the previous month, which was a notch above the 0.52% increase observed in December. The monthly rise reflected higher prices for electricity as well as for transport. Despite the price increase, annual headline inflation fell from 2.3% in December to 1.7% in January. The lower reading surprised private sector analysts, who saw inflation unchanged at 2.3%, and fell short of the Central Bank's forecast that inflation would fall to 2.0%. Meanwhile, at its latest monetary policy meeting, held on 3 February, the Central Bank left the two-week repo interest rate unchanged at a record low of 0.75% for the sixth consecutive month. The Central Bank has not altered its dovish tone since 6 May 2010, when the Bank last cut the two-week repo interest rate by 25 basis points. Monetary authorities kept the key monetary policy interest rate below the European Central Bank's main rate of 1.00%, arguing that headline inflation remained in line with the inflation target (2.0% 1.0%) and that inflationary risks are balanced. However, in contrast with previous meetings, the Central Bank stated that it was only one vote short of lifting the two-week repo rate, with three out the seven members of the board voting for an increase in rates by 25 basis points. The narrow decision suggests that the Bank may soon begin monetary tightening. The Central Bank expects inflation to rise to 2.3% in the final quarter this year before falling to 2.0% in the first quarter of 2012.

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