Year-on-year inflation accelerated to 2.9% in October. This is the fastest pace since 2012. However, inflation has already reached its peak and will ease in the coming months, according to our forecast. Nevertheless, core inflation will remain elevated. Therefore, the Czech National Bank will have to continue tightening monetary policy. Next year, we expect the central bank to hike rates four times in total.
In a year-on-year comparison, the price level rose 2.9%, which was fully in line with the central bank's forecast. This development was mainly influenced by food prices, which were up 7.8% yoy. Fuels were 2.5% more expensive than last year. Core prices rose 2.4% in October, according to our calculations.
Consumer prices grew 0.5% mom in October. The highest dynamics were recorded in food prices, mainly due to the higher prices of vegetables, butter, fruit and eggs. The seasonal rise in clothing and footwear also contributed to the price rise. Due to the development on commodity markets, we have also paid more at petrol stations (fuel prices were 0.8% higher mom). The koruna reacted by strengthening 0.3% to 25.52EUR/CZK.
Inflation has already found its peak, in our view. Although inflation is likely to stay in the upper half of the CNB’s tolerance band by the end of this year, it is likely to gradually ease next year. Food prices, which up to now have been growing due to higher prices of milk and animal products, should stabilise in the coming months. Fuel prices are likely to even become a drag on inflation due to lower oil prices and the stronger koruna against the U.S. dollar. Also, the statistical base effects will contribute to decelerate year-on-year inflation from November. The most important item of price growth will remain core prices, which are growing due to wage acceleration and strong domestic demand. We see core prices increasing a strong 2.5%, after 2.4% this year.
Therefore, the central bank will have to continue its monetary policy tightening. It will hike rates 25 bp each quarter next year till 1Q19, according to our prognosis, which will be the top of the current cycle. We see the three-month interest rate at 1.9% in 2Q19. Consequently, loans, including mortgage loans, are set to become more expensive.