CNB warns possible upward revision of 2017 inflation forecast after January CPI data

The Czech National Bank has cautioned that its inflation projection of 2017 might have to be upwardly revised after the worse than anticipated inflation data for January was released. Until now, the central bank has expressed confidence that inflation was being stimulated just temporary factors; however it cautioned on Friday that the inflation has overshot its projection in January by 0.3 percentage points due to higher core inflation.

Overshooting of the 2 percent inflation target might make conservative board members uncomfortable and rise in the possibility that the central bank would exit the FX targeting in the second quarter as compared with the third quarter, noted Commerzbank in a research report. The Czech National Bank has a ‘hard commitment’ not to do this until the second quarter, and ‘soft guidance’ that the exit would take place after mid-2017. The central bank is unlikely to deviate from its hard commitment; however, it might violate its soft guidance if the data for inflation were to move closer to 3 percent in the months ahead, stated Commerzbank.

The central bank is not interested in exiting the foreign exchange cap early. It published its board minutes on Friday that indicated considerable concern that an early exit might be more damaging for the economy than a too-late exit. The central bank makes such an assessment as it continues to have its full policy interest rate tool at its disposal to combat high inflation.

“For now, we stick with our mid-2017 timeframe for CNB to end its FX cap, but further sharp inflation acceleration would make an earlier timeframe more likely, in our view”, added Commerzbank.