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Czech Prices Drop In December On Cheaper Food, Reinforce Outlook For Rate Cuts

By Reuters
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Czech Prices Drop In December On Cheaper Food, Reinforce Outlook For Rate Cuts

Czech consumer prices unexpectedly dropped by 0.4% in December on a fall in food costs, easing year-on-year inflation to 6.9%, the lowest since September and keeping the door open to a series of interest rate cuts by the central bank.

The December price drop defied analysts' expectation in a Reuters poll of flat prices and 7.3% year-on-year increase, and also put inflation a tad below the bank's forecast of 7.0%.

The crown currency dipped to 24.68 to the euro from 24.55 in reaction to data clearly pointing towards fewer worries about price pressures, despite the fall coming from food prices that are outside the scope of monetary policy.

"For the central bank the December inflation is positive news that will allow it to lower interest rates by a quarter of a percentage point in February as well," said Petr Dufek, chief economist at Banka Creditas.

Household Demand

The Czech central bank cut its main repo rate by 25 basis points in December to 6.75%, starting a long-awaited easing cycle, amid household demand depressed by a drop in real incomes caused by two years of high inflation.

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Inflation readings since October were affected by a government energy subsidy to households in 2022, which created a one-off bump in inflation in the final quarter of 2023.

The Czech Statistical Bureau said that without this effect, the December year-on-year price rise would be just 4.2%. The average inflation for 2023 was 10.7%.

Inflation

The central bank expects that January will bring further drop in year-on-year inflation to 3% as last year's January price jump will not be repeated.

But while flagging further easing, central bankers have also said they would be conservative and raised questions over the size of January annual repricing by companies and service providers.

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A resurgence of price pressures could lead the bank to interrupt its rate-lowering cycle, two central bankers said in the past week, while the bank may also take larger than 25 basis-point steps if inflation slackens faster than expected.

Measured by forward rate agreements, the market was pricing in nearly 300 basis points of rate cuts by the end of this year on Thursday, with the 9x12 contract quoted at 3.73/78%.

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