June inflation reached 0.6% m-to-m, a shade above our forecast of 0.5% and a bit more above the market consensus of 0.3%. On the annual basis, inflation reached 4.1%, the highest level since end of 1998. Net inflation grew even faster, 0.7% m-to-m, as it controlled for changes in VAT on several services introduced during this spring. Net inflation reached 2.6% y-to-y. Higher-than-expected inflation in June was driven by several factors. Food prices jumped by 0.4% m-to-m, a rise that brought the annual food price index to 0.8%, highest level since November 1998. Transport prices grew 3.2% m-to-m, mainly on back on higher oil prices (+7.1% in June) and due to higher regulated prices in rail transport (+14.2%). Overall, we interpret the June inflation numbers as neutral for the monetary policy. While inflation did increase slightly more than was expected, the growth, however, was driven by factors outside the monetary policy reign - mainly oil and food prices. Therefore, there is little in the numbers that would give raise to a central bank's tightening of monetary policy.
The Czech Parliament has done it again and asked the government to issue yet another separate bond issue, this time covering costs of a plan to bail-out farmers affected by this spring's drought. Well, why not, but why then bother with the state budget at all? The Cabinet yesterday postponed its decision on the rent (de)regulation, as two ministries responsible disagreed. Similarly, the two ministries still disagree about the power sector privatization plans. So much for the government strategy and coherency…
The Czech koruna strengthened on back of high inflation numbers published yesterday. Prices rose 0.6% in June and the annual inflation shot above 4% level, last seen in 1998. Although we do not find his figure troublesome, markets reacted strongly and the koruna gained 5 hallers against the euro. However, as the CNB warned that it found the koruna too strong and that an intervention was possible, the koruna duly fell to 35.55 CZK/EUR level. It appears still too strong for the CNB's liking, though.
Czech bonds fell again on Wednesday. The fall was caused by higher-than-expected CPI figure (see above). Long-term bonds such as MoF 6.30, MoF 6.40, EIB 8.20 and old-taxation bonds such as MoF 10.55, MoF 12.20 were losing. Besides the government bonds the corporate bonds (Unipetrol, Radiomobil) fell as well. The yield of these bonds gets more attractive by a day. In the days to come we expect the next falling of the long bonds.
Current benchmark: MoF 6.75/05 99.55-85 (-30 bps), MoF 6.30/07 96.50-80 (-20 bps), MoF 6.40/10 96.55-85 (-25 bps).
(Ondrej Schneider and Michal Michalov)