(Bloomberg) -- Czech inflation unexpectedly accelerated in July, adding to signals for the central bank to exercise caution with further monetary-policy easing. The koruna gained.
Consumer prices rose 2.2% from a year earlier, compared with 2% in the previous month, the statistics office said Monday. The Czech National Bank said the reading exceeded its 2% forecast for the month mainly due to regulated items and food costs.
Policymakers in Prague are weighing a sluggish economic recovery - with household spending barely countering a decline in industrial output - against rising costs for services and a recovery in the housing market.
With overall price growth recently influenced by volatile items such as food and fuels, the central bank is closely watching core inflation that shows the underlying domestic demand-driven pressures. This price gauge rose to 2.3% in July, compared with the official forecast for 2.2%.
The central bank said core inflation has been stabilizing due to weaker growth in prices of foreign inputs as well the lasting impact of the previous slump in domestic demand. This is helping to curb profit mark-ups of producers, retailers and service providers, according to its statement.
“These factors moderating market services inflation are thus offsetting the buoyant wage growth,” the bank said.
Earlier this month, policymakers cut the benchmark rate by a quarter of a percentage point, after four consecutive half-point reductions, citing lingering inflation risks and a weakening koruna as reasons for a cautious approach.
The koruna gained 0.3% against the euro on Monday, reaching its strongest level in a month. The currency is up 1% since the Aug. 1 rate meeting.
Minutes from the bank’s last monetary-policy deliberations cited Governor Ales Michl as saying that it’s necessary to persist with tight monetary policy until core inflation is fully under control.
“From the CNB’s perspective, the July inflation data may serve as an argument for great caution about lowering interest rates further in the rest of this year,” said Radomir Jac, chief economist at Generali Investments CEE in Prague.
Still, Czech policymakers may consider reducing its benchmark rate in September, and also in the fourth quarter, if the US Federal Reserve and the European Central Bank cut their rates next month, he said.
(Updates with central bank comments starting in second paragraph.)
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