Czech Economy, Prices Grow; Interest Rates May Follow in Second Half

The Czech economy expanded on an annual basis in the first three months for the first time in five quarters, paving the way for the central bank to tighten policy in the second half of the year.

Gross domestic product rose 1.1 percent from a year earlier after a 3.2 percent contraction in the previous quarter, the statistics office in Prague said in a detailed GDP statement on its website today. Separate data showed the inflation rate rose to 1.2 percent in May, from 1.1 percent in the previous month, above the central bank’s forecast of 0.9 percent.

East European countries are emerging from the worst recession since the end of communism. Trade is picking up after the credit crisis curbed investments and companies cut jobs. The Czech Republic, home to Skoda Auto AS and Hyundai Motor Co. plants, gained from a pickup in demand in the euro area, its main trading partner, though risks remain if the recovery in the 16-nation bloc sputters.

“The coming recovery of the Czech economy should bring the need to tighten the monetary policy in the second half of the year,” Michal Brozka, an analyst at Raiffeisenbank AS in Prague said in a note. “However, this recovery is driven by foreign demand and the main concern is the outlook for the eurozone’s economic growth, which will be one of the main variables for the central bank.”

Koruna Gains

The koruna gained as much as 0.4 percent to the euro and traded at 25.993 as of 1:05 p.m. in Prague.

“Though the central bank forecasted a moderate pick-up in annual CPI inflation in the second quarter this year, in reality it was somewhat more striking,” the central bank said. Faster- than-expected growth in fuel prices and changes in regulated prices contributed to the rise in the inflation rate, it said.

The central bank said “no doubt” is cast on its inflation outlook by today’s data and it expects inflation to exceed its 2 percent goal this year and then fall below the target in 2011.

The Czech economy exited a recession last year and grew a seasonally adjusted 0.5 percent in the first quarter from the previous three months.

Trade Surplus

The country had its 16th consecutive trade surplus in April and industrial output rose to a 30-month high, driven by car production. Auto-industry output grew 29 percent in the first quarter and sales abroad increased 23 percent. Data showed on June 8 that the unemployment rate dropped to a six-month low in May.

The central bank on May 6 unexpectedly cut the benchmark two-week interest rate by a quarter-point to a record-low 0.75 percent, saying inflation would stay under its 2 percent target in 12 to 18 months. The bank kept its 1.4 percent growth forecast for this year and cut the 2011 outlook to 1.8 percent from 2.1 percent. It signaled in its forecast that interest rates will stay flat this year and start rising from next year.

The latest GDP data showed a revival in household consumption, which may point to stronger inflation risks than the central bank had expected, said Martin Lobotka, an analyst at Ceska Sporitelna, the Czech unit of Erste Group Bank AG.

Declining unemployment and rising wages may intensify inflation pressures, he said. “Stronger household demand and a weaker koruna should lead to reassessment of the current low rates already this year.”

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

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