Bloomberg News

Czech GDP, Prices May Aid Central Bank Rate-Increase Backers

June 09, 2011

(Updates with central bank comments in sixth and seventh paragraphs.)

June 9 (Bloomberg) -- The Czech Republic’s accelerating economic growth and inflation may support the central bank policy makers who advocate raising interest rates from record low before the fourth quarter.

Gross domestic product rose an annual 2.8 percent in the first quarter, compared with 2.7 percent in the final three months of 2010, the Prague-based Czech Statistics Office said today. The reading exceeded a 2.5 percent flash estimate on May 13. Inflation accelerated to 2 percent in May, matching the central bank’s target, from 1.6 percent in the previous month.

“Inflation is returning to the central bank’s target sooner than what was expected, which, combined with stronger GDP in the first quarter, indicates a chance for a quicker increase in interest rates,” Michal Brozka, an analyst at Raiffeisenbank AS in Prague said by phone. “The data still don’t signal rising demand pressures, so the central bank doesn’t need to rush with raising rates at the next meeting.”

The Ceska Narodni Banka kept the benchmark rate at 0.75 percent since May 2010 as central banks across Europe lifted interest rates to curb inflation. Policy makers moved forward the timing of a rate increase to the fourth quarter from the first quarter in 2012, reflecting expectations of more monetary tightening in the euro area, the central bank said on May 5.

The koruna gained as much as 0.4 percent today to 24.089 per euro, its strongest intraday level since then, and traded 0.1 percent stronger as of 1:15 p.m. in Prague. The yield on 2- year government bonds rose 6 basis points to 1.770 percent, according to data compiled by Bloomberg.

Divided Central Bank

May inflation exceeded the central bank’s forecast because of a faster-than-expected increase in food prices, the bank said in a statement posted on its website.

“Despite the deviations, the published inflation data for May are in line with the overall spirit” of the current central bank forecast, which says the domestic economy isn’t generating demand pressures on consumer prices and that inflation is driven mainly by commodity costs, the bank said.

Policy makers have shown differing views on inflation risks, with some central bank board members advocating higher borrowing costs.

Eva Zamrazilova and Kamil Janacek voted for higher borrowing costs at last meeting on May 5, while the remaining 5 policy makers voted for stable rates. The next three policy meetings are scheduled for June 23, Aug. 4 and Sept. 21.

The Czech economy, is driven by foreign demand for its goods, including Skoda Auto AS cars, as exports account for about 70 percent of GDP. Companies also supply parts to German manufacturers, which then sell their products outside the European Union.

Inflation was driven mainly by higher food prices, the statistics office said. Higher housing and energy costs as well as more expensive oil also helped push inflation above the central bank’s forecast of 1.7 percent.

‘Cost Factors’

“It was mainly a consequence of cost factors, while demand-driven inflation is virtually non-existent,” Jan Vejmelek, chief economist at Komercni Banka AS in Prague, wrote in a report. Komercni, a unit of Societe Generale SA, forecasts the benchmark two-week repurchase rate at 1.25 percent by year- end.

Exports and a revival in investments contributed the most to economic growth in the first quarter, the statistics office said. Household and government consumption declined as the Cabinet of Prime Minister Petr Necas curbs state spending.

The central bank forecasts GDP growth of 1.5 percent in 2011, and it sees the inflation rate at 2.2 percent in the second quarter of next year.

“Compared with the current central bank forecast, we expect higher GDP growth and a weaker koruna, which are factors supporting faster price increases,” Patrik Rozumbersky, an economist at UniCredit Bank Czech Republic AS wrote in a note. “Because of this, we expect that the central bank will start the rate increase cycle a little earlier.”

UniCredit forecasts the first quarter-point rate increase will be in September.

--With assistance from Zoya Shilova in Moscow and Krystof Chamonikolas in Prague. Editors: Douglas Lytle, Alan Crosby

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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