CEE ECONOMY - Czech inflation slows down in February, but not likely to cause central bank to cut rates

The preliminary data released on Wednesday showed that 'Czech inflation fell further below the central banks target in February. Its headline rate dropped to a lower than nine-month-low of 1.4% on the back of a slower food price increase and lower energy prices. The data comes after the Czech National Bank discussed a renewed policy of easing during its last meeting, on February 5. Conflict in the Middle East as a result of U.S.-Israeli strikes on Iran over the weekend has widened and upset?markets. Soaring oil and gasoline prices are fueling global inflation fears. In an interview with the news website www.seznamzpravy.cz published on Wednesday, Central Bank Vice-Governor Jan Frait said that recent developments could limit the room for a possible interest rate reduction.

Since January, the Czech Republic's inflation rate has been below its 2% target. It is expected to remain low in the coming year due to government measures that reduce household energy costs.

The preliminary February data from the Statistics Office showed that consumer prices fell by?0.1% on a monthly basis, while analysts had predicted a small rise. In a poll, analysts had predicted a slight rise.

In the poll, there was also a static headline reading of 1,6% on an annual basis, just as it had been in January. The central bank had also predicted 1.6%.

How long the conflict in Iran lasts is key

Conflict in the region of Iran, a major corridor for oil and gas exports has impacted global markets. Safe-haven assets, such as gold and the U.S. Dollar, are in high demand. Tuesday, the Czech crown fell to a six-month low as central European assets were under pressure. Patrik?Rozumbersky, an economist at UniCredit, said that the future of inflation will depend on the length of the Middle East 'conflict. He said that a longer conflict could result in other commodity price increases and bring Czech inflation to 2% at mid-year.

He said that if the geopolitical situation were to calm down faster, he expected inflation to rise above 2% permanently only by the end of the year.

Analysts believe the central bank will likely keep rates steady, having eased them last year as part of a 'cutting cycle.

Radomir JAC, Chief Economist for Generali Investments CEE said: "We don't expect an immediate effect on monetary policies - because the global economic is now at risk of higher inflation in connection with the developments around Iran."

(source: Reuters)