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Czech CPI inflation for May surprised the market to the upside, but it was below the central bank's monthly forecast: the inflation rate came in at 2.4 percent y/y compared to consensus expectation of 2.1 percent and CNB's forecast of 2.6 percent.
CNB held such a high forecast because it correctly noted that there was a weak base effect from May last year (which will also be the case in June). When world energy and commodity prices were rallying strongly last winter, Czech inflation was running at faster than 0.3 percent a month.
Now the commodity price rally has run out of steam, and the inflation pressure will normalise. Core CPI is maintaining a stable 2 percent inflation rate, which happens to be the central bank's target. In summary, it may have first appeared so, but there was no real hawkish surprise from the May CPI data – in fact, the central bank was pleasantly surprised.
"On the other hand, the underlying inflation rate is close to the target, hence there is no case for further monetary easing. We expect EUR/CZK to gradually decline in coming quarters towards 26.00," Commerzbank commented in its latest research report.
