Inflation for September fell to 0.0% y/y, representing a further drop from 0.2% y/y in August. We look for lower rates and yields as this keeps the door open for more rate cuts and it is now possible that the Czech central bank might introduce other measures to loosen monetary policy such as quantitative easing.
The Czech Statistical Office has this morning published inflation figures for September. Inflation dropped to 0.0% y/y. This is in line with our forecast and the consensus forecast, although it was significantly lower than the CNB projection for September’s inflation of 0.5% y/y.
Lower inflation outcomes in recent months than projected by the CNB in its latest inflation report suggest that the CNB is at risk of undershooting its inflation target of 3% +/-1 percentage point significantly this year. We expect this year’s average inflation to be 1.0% y/y – well below the CNB’s inflation target. Furthermore, we expect deflation in the Czech economy in spring 2010 and average 2010 inflation of 0.3% y/y – also well below the CNB’s inflation target range for next year of 2% +/-1 percentage point.
Taking into account our outlook for deflation in the Czech Republic next year, the Czech central bank might very well opt for alternative measures to ease monetary policy to avoid further undershooting its inflation target next year. It looks increasingly likely that quantitative easing might be introduced by the CNB. This morning the CNB governor Zdenek Tuma indicated that the CNB has “six or seven measures” to ease monetary policy. To us, that sounds very much like an indication that the CNB will soon start to talk about quantitative easing. The implications are obvious: lower rates and yields and a weaker CZK.
