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Czech Inflation Stays Below Target, Favors Record-Low Rates

Czech inflation slowed in March and stayed below the central bank’s 2 percent target, adding to arguments for keeping interest rates record low even after the European Central Bank started monetary tightening last week.

The annual price-growth rate fell to 1.7 percent from 1.8 percent in February, the statistics office in Prague said today. The median estimate in a Bloomberg survey of 12 economists was for 1.7 percent and the central bank’s forecast was 1.9 percent.

The rate lagged the bank’s forecast because rising prices of farming products abroad and locally continued to have a “limited” effect on Czech food prices while regulated prices grew at a “slightly” slower pace than expected, the central bank said today. Inflation pressures from the domestic economy are “not significant,” according to the statement.

“Demand-driven inflation is invisible and the central bank might not need to rush with raising interest rates,” Michal Brozka, an analyst at Raiffeisenbank AS in Prague said in a note. “We continue to expect an interest-rate increase in the third quarter,” though there still is a risk of a policy tightening earlier, he said.

The Prague-based CNB’s board voted 5-1 to keep the two-week repurchase rate at 0.75 percent on March 24. The bank has kept borrowing costs at a record low since May 2010 as the economic recovery slows. This contrasts with the ECB which raised its main rate to 1.25 percent on April 7 to stem inflation.

‘Enough Factors’

The Czech central bank includes euro-area borrowing costs among the variables in its economic forecasts. There are differing views among Czech policy makes on inflation risks, with some board members advocating higher interest rates.

The ECB’s move last week doesn’t change Czech inflation risks, central bank Governor Miroslav Singer told reporters today in Prusanky, Czech Republic.

“I don’t think that anyone on the bank board was surprised by the move with ECB rates,” Singer said. “It doesn’t change the risks significantly in any direction.”

Board member Eva Zamrazilova voted for a quarter-point increase in March. Kamil Janacek, who didn’t attend the last meeting, said on April 6 he “sees enough factors” to justify an increase at the next meeting on May 5. Vice-Governor Mojmir Hampl said on April 7 his view on economic developments hasn’t changed since the March meeting, when he voted for stable rates.

The central bank, which doesn’t publish a policy bias, estimates price growth will match its 2 percent target in the first quarter of 2012 and accelerate to 2.1 percent in the following three months. The bank’s latest forecast from February assumes market interest rates will rise from the end of 2011.

The koruna has appreciated 2.4 percent versus the euro this year, the third-best performance among more than 20 emerging- market currencies tracked by Bloomberg. The Czech currency was unchanged today at 24.422 per euro as of 1:35 p.m. in Prague.

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

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

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