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GS on Czech Inflation and CNB

CZECHIA
  • On GS estimates, inflation expectations and resulting second-order effects on inflation are becoming increasingly worrying.
  • Although the upside surprise relative to consensus on the month was small, the gap relative to the CNB’s May Inflation Report forecast is large (+17.2%yoy vs. +15.0%yoy).
  • Part of this upside surprise was already known at the time of the June Board meeting (the May reading of +16.0%yoy was 1.1pp above the CNB’s forecast).
  • However, the gap between actual inflation and the CNB’s forecast has now grown to 2.2pp, implying that the June data represents a ‘new’ hawkish surprise for the CNB.
  • In addition, the CNB continues to intervene relatively heavily to support the CZK. While the central bank has no shortage of reserves, the fact that it is having to intervene to support its currency is another hawkish signal for the CNB’s Board.
  • Both developments argue for the need for further monetary tightening when the CNB’s Board next meets on August 4.
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