(Bloomberg) -- Czech inflation slowed more than expected in May, weakening the koruna as domestic and global economic trends create a dilemma whether the central bank should slow policy easing this month.   

Annual consumer price growth eased to 2.6% from 2.9% in April, the statistics office said on Tuesday. While the reading was below the median analyst estimate in a Bloomberg survey, it exceeded the Czech National Bank’s 2.5% projection for the month. Core inflation — a measure of underlying domestic price pressures — came in at 2.5% and was below the bank’s forecast.

Inflation is remaining near the 2% target as the economy is slowly recovering from a shallow recession. Still, policymakers in Prague have warned about risks from rising domestic cost of services and an outlook for the European Central Bank and the US Federal Reserve keeping rates at elevated levels for longer.   

After three consecutive reductions by half of a percentage point each — which brought the Czech benchmark rate to 5.25% — money market prices indicate that most investors are betting on a smaller cut on June 27. Faster-than-expected wage growth reported earlier this month is boosting households’ purchasing power and represents a potential inflation risk.

Volatile food prices were the main reason for May inflation coming in slightly above the forecast, while the easing core measure reflects lower foreign inputs and weak domestic demand in the past, according to the central bank. Companies’ shrinking profit margins have helped curb the growth in the cost of goods, the bank said in a statement, without commenting on policy implications.

“By contrast, growth in services prices accelerated slightly and thus remains elevated,” it added.

The koruna was among the worst-performing emerging-market currencies on Tuesday, weakening as much as 0.5% to the euro as some investors saw the inflation slowdown as leaving the door open for another half-point rate cut. Yields on the domestic government bonds also dropped.

The slowdown in consumer price growth “should be seen as positive news” by the central bank, according to Radomir Jac, chief economist at Generali Investments CEE in Prague.

“But external factors, especially uncertainty over the ECB’s and Fed’s monetary-policy outlook, could lead the bank board to ease the pace of rate cuts to a quarter of a percentage point in June,” he wrote in a note.

(Updates with core inflation in second paragraph, CNB comment from fifth.)

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