Czech Policy Makers See Inflation Anchored Amid Balanced Risks

Most Czech policy makers consider inflation expectations anchored near the central bank’s target and risks to price growth relevant for monetary policy are balanced, according to minutes from the June 23 board meeting.

The Prague-based Ceska Narodni Banka board voted 5-2 to keep the two-week repurchase rate at 0.75 percent, a half-point below the European Central Bank’s main rate, last week. Eva Zamrazilova and Kamil Janacek voted for a quarter-point rise, the minutes, posted on the bank’s website today, showed.

“The bank board agreed the Czech economy is currently showing some recovery,” according to the minutes. “Opinions on the degree of the recovery and its implications for inflation outlook differed.”

The Czechs have kept the main rate steady since May 2010 as central banks across Europe lifted borrowing costs to curb inflation. Poland increased its benchmark rate for a third month on June 8. Czech policy makers are weighing differing signals from the economy as output growth and headline inflation accelerated while state spending cuts continue to damp domestic demand.

Some Czech board members said domestic demand remains weak and economic growth driven by exports isn’t creating inflationary risks as it leads to an appreciation of the koruna and tames price pressures, the minutes showed.

Recovery

Some policy makers considered the current recovery to be the start of stable economic growth, which may represent an inflationary risk.

A planned increase in the value-added tax, which still needs to be approved by parliament, may increase headline inflation, the minutes showed.

“A majority of board members agreed that long-term inflation expectations are stable and anchored near the inflation target,” according to the minutes. “A change in the VAT doesn’t represent a risk of a long-term increase in overall inflation.”

Inflation accelerated to 2 percent in May, matching the central bank’s target, from 1.6 percent the previous month, driven mainly by higher food prices, the statistics office said on June 9. Housing and energy costs, as well as more expensive oil, also helped spur inflation above the central bank’s 1.7 percent forecast for May.

Gross domestic product grew 2.8 percent in the first quarter on the year, compared with 2.7 percent in the final three months of 2010, with exports and a revival in investments contributing the most to the expansion. Household and government consumption declined as the Cabinet of Prime Minister Petr Necas trims state spending.

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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