Articles
13 April 2023

Czech inflation moderates but there’s still risk from a tight labour market

March Czech CPI softened in line with expectations and marks the lowest year-on-year reading since April 2022. However, the Czech National Bank may still be worried about wage growth exceeding 10% YoY

The building of the Czech National Bank in Prague
The building of the Czech National Bank in Prague

CPI moderates, but wage growth remains strong

It is clear that the moderation of Czech headline inflation continues. In March, Czech CPI increased by 0.1% month-on-month and headline inflation moderated from 16.7% to 15% (in line with consensus, ING estimate was 16.8%). This is the lowest year-on-year inflation reading since last April.

The main contribution to the March decline came from base effects. Fuel prices declined 1.8% MoM which resulted in their YoY decline of almost 20%. The additional contribution to the decline of headline inflation came from gas prices, which fell 1.4% MoM, and YoY growth moderated from 74% to 60%. It is worth mentioning the softer decline of owner-occupied housing costs which some Czech National Bank (CNB) board members observe as an extension of the price stability environment.

What may worry the CNB board, however, is the still hefty growth of wages in industry at the beginning of the year. This exceeded 10% YoY and hence remained above the critical threshold mentioned by, for example, Vice Governor Eva Zamrazilova. The tightness of the labour market was also confirmed by the recently-published decline in the unemployment rate by 0.2bp to 3.7% in March.

The relatively hawkish comments made recently by Jan Kubicek, the newest member of the CNB board, show that the central bank remains quite cautious about possible monetary policy normalisation. And if the labour market were to develop towards a more pro-inflationary direction, even a debate about another rate hike cannot be ruled out.

Czech inflation and ING forecasts

 - Source: ING, Macrobond
Source: ING, Macrobond

A normalisation debate could start in August

The Czech Finance Ministry yesterday published its new inflation outlook, with a view of headline inflation falling gradually below 10% YoY in July and further declining to 8% YoY by the year-end. ING's view is a bit less optimistic, expecting headline inflation to remain a touch above 9% by the year-end. Nevertheless, this is still unlikely to open debate about CNB rate cuts anytime soon. On the contrary, the growth of wages in industry above 10% YoY at the beginning of the year is above the CNB's comfort level.

We see the CNB only starting the debate on the possible normalisation of monetary policy when inflation moderates close to the current level of interest rates (7%). The first possibility for such a debate about a symbolic 25bp interest rate reduction could possibly be in August when the new summer inflation outlook will be discussed. But given the prevailing risks from tightness in the Czech labour market, we do not expect more than a 50bp rate reduction by the year-end.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).