Czech Inflation May Point to More Policy Easing After Cut

Czech September inflation was below the central bank’s forecast for a sixth month as household consumption weakened, suggesting more monetary policy easing after an interest rate cut to a record low.

Consumer prices grew 3.4 percent from a year earlier, the Statistics Office in Prague said today in a statement, matching the median forecast of 14 economists in a Bloomberg survey. The central bank’s estimate was 3.5 percent. Inflation was 3.3 percent the previous month because of factors outside the influence of monetary policy, including a sales-tax increase and global commodity costs.

The Czech economy is suffering from weak domestic demand after the government cut investments and raised sales taxes to trim the budget deficit. The central bank cut the benchmark interest rate to a record-low 0.25 percent on Sept. 27 and said it may weaken the koruna if it needs to ease monetary policy further.

“The domestic economic environment still remains disinflationary: retail sales are soft, real wages declining, consumer sentiment heading south-east,” Vojtech Benda, an economist at ING Bank in Prague, said in an e-mailed note. “It seems likely the Czech National Bank board will continue with further policy loosening and another cut on interest rates, close to zero, until the end of the year seems likely.”

Easing Trend

The Czech koruna was unchanged at 24.93 per euro as of 1:56 p.m. in Prague. The currency has lost 2.5 percent since reaching a 2012 high of 24.326 against the euro four weeks ago.

Monetary authorities in eastern European Union members are following central banks in the U.S. and U.K. in policy easing to address an economic slowdown as Europe fights a sovereign-debt crisis.

Hungarian central bankers lowered the two-week deposit rate to 6.5 percent from 6.75 percent in September, the second reduction in two months. Poland’s central bank signaled it may cut borrowing costs next month if the economy slows further after unexpectedly leaving the main rate at 4.75 percent on Oct. 3.

While the trade balance remains in surplus, the debt crisis has curbed purchases of electronics and cars. The 27-nation EU buys 80 percent of Czech exports, including from companies such as carmaker Skoda Auto AS.

Economic Contraction

Czech gross domestic product declined 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, as consumers responded to the worsening economic outlook by spending less.

On the month, consumer prices fell 0.1 percent, the third such decline in a row, the statistics office said. The drop, which matched the median forecast in a Bloomberg survey of 12 analysts, was driven mainly by falling prices of leisure services, the office said.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 2.1 percent in September, the central bank said in a statement on its website today. The bank targets the monetary-policy inflation rate at 2 percent and sees it at 1.5 percent in the third quarter of next year, according to its latest forecast.

“The data confirm the view expressed in the central bank’s forecast of a disinflationary impact of the domestic economy,” the bank said in the statement. Even as the nominal rate is set to remain “slightly” above 3 percent, the pick up in inflation has been driven mainly by one-off factors such as higher value- added tax, fuel and food fuel prices, as well as a recent weakening of the koruna, it added.

The central bank may choose a weakening the koruna rather than another interest-rate cut to stimulate the economy, economists including Vaclav France at Raiffeisenbank AS in Prague said.

The September data “should support will of some policy makers to further relax monetary policy, mainly through the foreign-exchange channel,” he said in an e-mailed note.

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

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

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