Czech inflation slows but central bank not likely to rush another rate cut

Czech inflation slowed in August as expected, preliminary data on Thursday showed, although recent signs of price pressures in the economy are likely to keep the central bank from taking further steps in an easing campaign for now.

The fresh inflation data came after second-quarter wage data showed a stronger rise in pay than expected while economic activity last quarter was also hotter than predicted.

After spiking to the upper band of the central bank's tolerance range in June, inflation cooled a second straight month, falling to a headline rate of 2.5% year-on-year in August, according to the statistics office's flash estimate on Thursday.

That was in line with a Reuters poll forecast and below the Czech National Bank's (CNB) expectation of 2.7% in its latest outlook.

The bank has been cutting interest rates since the end of 2023, halving the main rate to 3.50% in that time. But it has paused at its past two meetings and said inflation pressures do not allow further easing at this point.

Analysts said the bank was likely to remain cautious.

Wage data on Wednesday showed nominal wage growth of 7.8% year-on-year, more than 1 percentage point higher than what the central bank expected.

Data last week also showed the economy expanded at its fastest pace in three years, at 2.6% year-on-year, backed by recovering household demand.

"Inflation may continue to decline slightly during the fall, but it will probably not reach the (central bank's) target of 2% until 2026," said Petr Dufek, chief economist at Banka Creditas.

"Even though inflation is currently lower than the CNB expected, inflation trends have not changed yet. Moreover, given wages, the central bank will probably remain on alert and will probably not rush to cut rates."

The bank next meets on September 24.

After holding rates steady in early August, Governor Ales Michl said services inflation and core inflation remained elevated and rising property prices were a risk. He said all options were open on the future trajectory of rates.

Services inflation slowed slightly to 4.7% in August, according to the preliminary data on Thursday.