The scale of the decline in inflation in Central Europe over the past month has taken many by surprise and reinforced expectations in the financial markets that monetary policy will remain very loose. However, this fall in inflation was due almost entirely to a drop in petrol price inflation which is now close to a trough, and it masked a further rise in core inflation. We think tightening labour markets will push core inflation up further in the coming months, leading to a fresh rise in headline rates. Against that backdrop, we expect the Czech central bank to begin raising interest rates as soon as next month, while other central banks in the region will follow suit by next year.
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