Higher inflation changes our outlook
written by KBC Economics
September inflation came in visibly above our forecast. Prices were flat month-on-month, so headline inflation rose from 1.9% to 2.5% year-on-year (our forecast 2.3%, CNB forecast 2.1%). This time, the structure may also unsettle part of the CNB Board, as core inflation was higher. Combined with the relatively hawkish minutes of the last Board meeting and a visibly weaker koruna, this significantly raises the probability of a rate hike at the upcoming November meeting. We have therefore decided to change our outlook: our baseline scenario now includes one additional hike, taking the policy rate to 4.0%, followed by a prolonged period of stability at that level (until the end of 2027).
As expected, the September figures were pushed up by a further increase in fuel prices. The seasonal decline in food prices was no surprise either, although it was somewhat milder than we had assumed. At the same time, we see slightly stronger momentum in non-energy goods prices and marginally stronger momentum in services prices. As a result, once the detailed breakdown is published, we will probably see core inflation rising from 3.0% to 3.1% in September rather than remaining stable as we had expected. And it is precisely core inflation that the central bank flagged with concern in its latest minutes. With core inflation higher, the Board may take a stricter view of persistently high energy prices on global markets and of the restart of energy and food inflation in 2027 (both components are helping to contain inflation this year). The current "weakness" of the koruna is unlikely to reassure it either.
In our baseline scenario, today's figures therefore do not lead us to raise our inflation outlook for 2027 (only slightly for the end of 2026). What we are reassessing is the mood and the balance of votes within the CNB Board. Given somewhat higher core inflation and the considerable uncertainty surrounding the January repricing (energy in particular), we expect that votes in favour of one additional rate hike may narrowly prevail in November.