Food prices seem to have renewed their increase in April after falling by 0.2% m/m in March, monthly food prices data of the Czech stats office showed. Overall, more than half (15) out of the 26 products, among which four with bigger than 5% weights, had their prices increasing m/m in April. In particular, among the items with higher weight, prices of loin of pork on bone increased by 2.1% m/m, of white bread – by 0.2% m/m, of ham sausage and of drawn chicken – by 0.6% m/m and 0.3% m/m, respectively. At the same time, the prices of table mineral water were down by 4.6% m/m, of Edam cheese – by 5.7% m/m, while of granulated sugar — by 1.9% m/m. We thus estimate that food prices have increased by 0.1% m/m in April after the 0.2% m/m decrease in March, which led to the annual increase of food prices decelerating to some 4.3% y/y in the month (from 4.4% y/y in March), thus having minor 0.02pps negative contribution to headline inflation change in the month. Other data by the stats office showed that fuel prices decreased by 0.8% m/m in the first two weeks of April as compared to their average level in March after declining by 0.6% m/m in March. This is contrary to the 3.3% monthly increase registered in April 2016 so overall fuel prices are likely to have had about 0.13pps downward impact on the annual headline inflation change in April 2017.
Given the above, we expect annual headline inflation in April to slow down from 2.6% y/y in March towards the CNB’s 2% target in line with expectations. This would be also supported by the crown’s firming (so far only moderate) that would deliver part of the monetary tightening the CNB reckons with. Therefore, we do not expect the CNB to proceed with monetary tightening via interest rates at its next monetary policy meeting on May 4. Recall that the CNB has been clear that before that it wants to allow the crown to find a new equilibrium level reflecting the economy’s fundamentals (which the central bank does not believe is too far from the already abandoned EUR/CZK 27 intervention level). CNB Governor Jiri Rusnok has estimated that it would take about two months for the crown to stabilize. Moreover, Rusnok has indicated a couple of days ago that if inflation develops sustainably and returns to the 2% inflation target in a stable manner, the central bank could start gradually raising interest rates at turn of 2017 and 2018. Note that according to the latest (March) CNB’s financial market inflation expectations survey, 9 out of the 15 analysts expect the CNB to keep ZLB in March 2018, but the number of analysts expecting the rate to be raised in one-year time increased to 6 from 4 in the February survey. At the same time, interest rates can be raised earlier that currently predicted by Rusnok if the crown does not firm sufficiently to stabilize inflation around the target and inflation continues overshooting it significantly. Rates can be raised earlier also in case that the tight labor market and the increasing labor force shortages result into quite strong upward wage pressures that push inflation close to or even above the 3% upper bound of the target band around the 2% target. Interest rates can be also raised in case that inflationary shocks hit the economy, as well as in case of a prolonged and excessive weakening of the crown, but in the latter case the interest rates hike is more likely to be preceded by a fx intervention, the CNB has said.