http://www.businessweek.com/news/2013-04-09/czech-inflation-stays-below-target-amid-koruna-sales-talk

Bloomberg News

Czech Inflation Stays Below Target Amid Koruna Sales Talk

April 09, 2013

Czech consumer-price inflation was slower than the central bank’s target for a third month in March as policy makers debate whether to stimulate the recession-hit economy by weakening the koruna.

The inflation rate was 1.7 percent, unchanged from February, the Statistics Office said in a statement on its website today. The reading matched the median estimate in a Bloomberg survey of 16 analysts, while prices rose 0.1 percent from the previous month. The central bank had forecast annual inflation at 2 percent in March, the same as its target.

The Ceska Narodni Banka in Prague, which cut borrowing costs three times to effectively zero last year, is navigating in uncharted waters as its board debates whether to engage in currency interventions amid a record-long recession. The $217 billion economy is shrinking as households and businesses spend less due to Europe’s debt crisis and government austerity measures.

“From the central bank’s perspective, these data are anti- inflationary as its latest forecast saw March inflation at 2 percent,” Jiri Skop, an economist at Komercni Banka AS (KOMB) in Prague, said in an e-mail. “Verbal interventions for a weaker koruna will probably continue, although levels of around or above 25.5 per euro are suitable for central bankers.”

Koruna Losses

The koruna has lost 4.7 percent to the euro since Sept. 17, the day before central bank Governor Miroslav Singer first said the central bank may sell the currency to meet its inflation goal. It was the fourth-worst performance in that period among the 25 emerging-market currencies tracked by Bloomberg. The koruna weakened less than 0.1 percent to trade at 25.740 to the euro as of 1 p.m. in Prague.

The domestic economy is more subdued than the central bank had expected and weaker household demand signals deferred consumption due to declining prices except for food and fuels, the bank said last week in minutes from its March 28 policy meeting.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.9 percent, unchanged from February and below the central bank’s 1 percent to 3 percent target band.

“The published figures signal a slight anti-inflationary risk to the CNB’s current forecast,” the central bank said in a statement on its website. “According to this forecast, tax changes and gradually falling food, administered and import price growth are currently the sources of inflation. By contrast, the domestic economy is dampening inflation.”

Shrinking Economy

Fourth-quarter gross domestic product shrank 0.2 percent from the previous three months, marking the fourth consecutive quarterly decline. Household spending fell 3.5 percent in the full year of 2012, the first decline since 1998, the statistics office has said.

The koruna is at the center of policy plans as its depreciation helps boost the competitiveness of Czech goods on foreign markets and makes imports more expensive, thus limiting deflation risks.

March inflation data didn’t change the economic picture very much, Martin Lobotka, an analyst at Ceska Sporitelna AS in Prague, said in an e-mail.

“There is certainly no threat of demand-driven inflation pressures, and there is no threat of deflation either,” Lobotka said. “We think the central bank will stay calm and won’t engage in interventions unless there is a significant economic slowdown, at least similar to 2012, or the koruna gains sharply, beyond 25 per euro.”

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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