CEE Region: Czech Inflation Drops to Single-Digit Territory

CEE: Czech inflation back in single-digit territory

This morning Romanian inflation posted another decline from 10.6% to 10.25% year-on-year, in line with market expectations. Later today we will also see June inflation in the Czech Republic, which should complete the picture in the region. We expect a drop from 11.1% to 9.6% YoY, slightly below market expectations. This should put inflation in the Czech Republic in single-digit territory, the first country in the region to see this. The market at the moment is pricing in a roughly 100bp CNB rate cut this year. We expect the first cut in November with the risk of a delay until the first quarter of next year. However, we think rapid disinflation will be a signal for the market to price in more rate cuts and the market may stay in this mode all summer due to further falls in inflation. However, disinflation should stop in the autumn months, which will worry the central bank.

On the FX market, the Czech koruna has been stuck in the 23.60-90 EUR/CZK range for the past month, disappointing our expectations for a stronger koruna. Today's inflation number should be negative news for the CZK and the interest rate differential. However, the latter has not been a very strong factor in recent weeks and the main role, as in the rest of the region, is played by the global story, the higher EUR/USD and improved sentiment compared to last week. These indicate the scope for further gains. Thus, after a volatile morning, we expect the koruna to get back on track and test 23.750 EUR/CZK today. Elsewhere in the region, we continue to expect further gains for Hungary's forint and Poland's zloty for the same reasons. EUR/HUF could fall below 374 today and EUR/PLN below 4.430.