The Czech fixed market rallied yesterday, as the January inflation readings came
out much lower that the market expected, notably at 1% m/m, whereas the market
expected 1.6% m/m. The result is thus closer to the estimate of the central bank,
which assumed an increase in prices of around 1.2 %. Recall that year-on-year inflation
fell from 1.7% in December to 1.3% in January.
The unexpectedly low January inflation result is primarily the result of a lower increase
in regulated prices associated with housing, primarily the largely symbolic increase
in net rent and certain other housing costs, with the exception of natural gas.
This indicates that not even the partial relaxation of regulated rents resulted in a significant
increase in housing costs and thus inflation, although one cannot rule out the
possibility that rents will increase further at the start of the second half of the year.
The second reason for the lower than expected price increase is the delay in the
price increase for cigarettes, which is only very slowly reflected in inflation, but inflation
will increase in the months to come. Altogether, last year’s increase in excise
duty for cigarettes should increase inflation by 0.6 of a percentage point. The movement
of other prices in the consumer basket was no surprise. There was a seasonal
increase in food prices, and in contrast the prices dropped for clothing and petrol,
which reduced transport costs. The change in calculation, when the statistical office
changed the structure of the consumer basket, also played a minor role.
In our view the low level of inflation in January indicates that the CPI will probably
remain under the CNB target for most of the year, and the CNB will therefore not
have to increase rates in the first half of the year. As a result we have to rewrite our
outlook for the CNB repo rate for this year. Previously, we had thought that a
next rate hike could come in April while the second 25 bps should be added in
October. Now we think that there will just one 25 bps rate hike this year delivered
probably in the last quarter of this year.
Today, the bull-run on the Czech fixed-income might continue as Fed’s Benanke assessment
of the US economy should be positive both for bonds and emerging markets.
However, the gains at the short end of the curve and money market might be
limited after the very strong rally yesterday.
ČSOB - Investment research