Czech Sept CPI up 2.8 pct yr-on-yr, in line with expectations

Oct 8, 2007 - Czech inflation accelerated to the fastest in 13 months in September, closing in on the central bank's target and suggesting interest rates may rise again as early as this month.

Consumer prices rose an annual 2.8 percent, up from a 2.4 percent in August, the Prague-based statistics office said on its Web site, matching the median estimate by 13 economists surveyed by Bloomberg. Consumer prices fell a monthly 0.3 percent, at half the pace from September 2006, the office said.

The central bank has been lifting the European Union's lowest rates for two years on concern the consumption-driven expansion will foster price growth. Policy makers target inflation one point either side of 3 percent and have signaled borrowing costs will have to rise further because consumer-price increases are forecast to exceed 4 percent next year.

"Inflation confirms the central bank's assumption that a stagnation of prices during the summer months was just a temporary factor," said Patrik Rozumbersky, the chief economist at Zivnostenska Banka AS, who sees a rate increase this month. "The basic effect and steep growth of some food prices in the rest of the year will push inflation markedly above 3 percent."

Koruna Advances

The koruna was trading at 27.49 per euro by 5:03 p.m. in Prague, compared with 27.550 on Oct. 5. The ask yield on the government bond due 2016 rose 1 basis point to 4.304 percent. The price fell 0.1, or 10 koruna per 10,000 koruna ($511) face amount, to 118.100, according to Komercni Banka AS prices. A basis point is 0.01 percentage point.

September's inflation compared with the central bank's forecast of 2.9 percent, pushed lower by core inflation, Tomas Holub, the head of the central bank's monetary and statistical department, said on the central bank's Web site.

Food, cigarettes and fuel prices for automobiles were higher than predicted in the July forecast, he added.

The central bank foresees annual price growth of as high as 4.5 percent next year, driven by higher indirect taxes and regulated prices.

The mid-point peak of the so-called monetary-policy inflation, which excludes the effect of one-time changes in indirect taxes that the central bank omits, is projected to jump to 3.7 percent in 2008 from about 1.8 percent in September.

Central bankers raised the key two-week repurchase rate in May, July and August, bringing it to 3.25 percent, still below the European Central Bank's 4 percent.

Seasonal Declines

The monthly price growth was driven by a seasonal drop of costs of travel packages, which were on average 16.1 percent lower last month than in August, the statistics office said.

That decline, which was less than usual due to new methodology for data collection that makes the data less volatile, caused prices to be 0.2 percent higher than a year ago, the office said.

In the month, transportation costs were lower, with motor fuels shedding 0.9 percent, while regulated rents added 1.3 percent. Education prices increased 1.8 percent in month, followed by a 0.9 percent growth of clothing and shoes prices while food got only 0.1 percent more expensive last month.

Adjusted inflation, excluding food and motor fuels, which measures inflationary pressures of domestic demand, jumped to 1.1 percent in September from 0.6 percent, according to calculations of Jiri Skop, an economist at Komercni Banka AS in Prague.

Rate Increase

Economists are split on whether the central bank will come up with another rate increase this year or wait until 2008 to bring the repo rate higher. While Skop predicts the benchmark rate to be lifted twice this year and two more times in 2008, others say the bankers may refrain from any action this year.

Interest-rate futures show investors have scaled back expectations of rate increases, reflecting the stronger-than- projected koruna and a reduced outlook for lending rates abroad.

The forward-rate agreement used to gauge bets for the six- month Prague Interbank offered rate beginning six months from now, traded at 3.79 percent, down 23 basis points over the past two months.

"A pickup of inflation is triggered by food, gasoline, cigarettes and other cost factors, still not by demand," said David Navratil, an economist at Ceska Sporitelna AS in Prague. "With the koruna stronger than anticipated by the central bank, a hawkish argumentation gets one blow after another."