CPI inflation strengthened from 2.7% y/y in June to 2.9% y/y in July, according to figures of the statistical office. The print was slightly above expectations, as the consensus projected inflation to reach 2.8% y/y in July. The print was also expectedly above the CNB forecast, at 2.7% y/y in July, though the CNB itself implied that a slight overshooting of its inflation would be of no consequence for monetary policy.
Consumer prices rose by 0.4% m/m, mostly grounded on a 24.8% m/m hike in the price of package holidays, which is entirely due to seasonal factors. Apart from that, food and fuel prices developed broadly in line with our proxies, as food prices fell by 0.5% m/m, while fuel prices by – 1.3% m/m. The seasonal spike had a notable impact on headline price growth, accounting for just under a third. The rest was due to core prices, which continued to grow at a solid rate.
In annual terms, it was food and beverage prices which brought about the acceleration in CPI inflation, as they rose by 4.1% y/y in July (our proxy pointed at 3.9% y/y), an 18-month high. It was largely due to a base effect, as food prices fell considerably in July 2018 and this year’s decline wasn’t even close to match. There was also an upward impact on core inflation, which includes beverage prices. Thus, even seasonally-adjusted core inflation accelerated again to 2.3% y/y in July, a 19-month high. We believe there are some supply factors here, as reports suggest hops have suffered a lot from poor weather conditions over the past two years, which is pushing beer prices upwards. At any rate, core inflation remains elevated and is in line with the CNB’s latest assessment that domestic factors suggest pro-inflationary pressure.
Despite stronger inflation in July, we expect that there will be no impact on monetary policy. It was argued first at the MPC meeting statement and then in the minutes that a majority on the CNB board sees domestic pro-inflationary factors balanced out by external factors, which are strongly anti-inflationary. The latter comes from external uncertainty, related to the possibility for a disorderly Brexit on Oct 31 (with ever growing chances) and the possibility that the US government may impose import tariffs on the European car industry. The minutes from the latest MPC meeting said clearly that the CNB would be content in seeing inflation contained within the tolerance band (2%+/-1pp) rather than being close to the target itself, as long as this level of uncertainty persists. Besides, inflation remains pushed by volatile prices, which roughly correspond to the deviation from the CNB forecast, so we expect to see no push for monetary tightening.
Circumstances may change, and if inflation remains above the upper end of the tolerance band (3%) for an extended period of time (at least a few months), then we may see a more hawkish response from the CNB. Until then, however, we expect that interest rates will remain unchanged, as it appears to be the baseline scenario that the CNB board follows at the moment.