In yoy terms, inflation reached double-digit levels for the first time since July 1998. It accelerated from 9.9% yoy in January to 11.1% yoy in February. This was more than our forecast (10.6% yoy) and the market consensus (10.4% yoy). The CNB had expected inflation in February to be 9.7% yoy. Like mom inflation, the annual increase in consumer prices was significantly supported by housing-related costs. These reflected a rise in energy prices, which have included value-added tax since January (after its waiver in November and December). In February, the price of electricity increased by 22.6% yoy and of natural gas by 28.3% yoy. Moreover, imputed rents continued to grow rapidly, by 15.7% yoy. They reflected, among other things, high prices for building materials and new flats. As a result of previous price increases in crude oil and agricultural commodities, strong contributions to February yoy inflation also came from transport and food.

We expect inflation to average 9.3% this year. Given the recent sharp increase in commodity prices, the risks to our forecast are skewed toward even higher inflation. The CNB expects average inflation at 8.5% in 2022. Higher energy, fuel and food prices should continue to contribute the most in the coming months. As energy is necessary for the production of most goods and services, we are also likely to observe secondary effects in other prices. We expect inflation to accelerate further in the coming months, peaking at 12% yoy over the spring. However, especially due to the turbulence in commodity markets, the inflation forecasts are subject to considerable uncertainty.

In our view, the Czech National Bank will have to respond to the strong inflationary pressures by further raising interest rates. Until now, we had expected a 25bp hike at the March meeting, but we now think it will be 50bp. Moreover, we see the risks skewed to slightly higher rates. We expect the CNB’s interest rates to peak above 5% and think that their decrease is likely to be postponed until next year.

Regards,

Martin Gürtler

Economic and Strategy Research

Komerční banka

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