CZK: Tricky inflation print to test CNB pain threshold
After Poland and Hungary, July inflation will be published today in the Czech Republic, and we think it will be the trickiest reading so far this year. July will bring a third round of energy price hikes and this time, the month-on-month jump should be a record. However, the problem is the uncertain ratio of fix/float contracts and the approach of the statistical office to such a massive jump in energy suppliers' price lists. Overall, we feel comfortable on the high side of estimates and believe the market may be underestimating these price changes. Thus, we expect inflation to jump from 17.2% to 18.5% today, while the market is expecting 17.9%. The central bank expects 18.8% in its new forecast, but even a higher number cannot be ruled out at this point. For the Czech National Bank, however, we believe the pain threshold is high given that any surprise will come from energy prices, which the new board places on the cost side, thus out of the central bank's reach.
From a market perspective, just a few days ago, we would have expected the news to fuel hawkish expectations that the central bank might react anyway. However, yesterday's 20bp jump in the short end of the curve, presumably in preparation for today's inflation, and profit-taking, should limit that market reaction. On the FX front, the market remains safely away from the 24.60-24.70 level after last week's CNB meeting and for now is vainly gathering strength for another stage of attack against the central bank, which has been defending the koruna.