Czech Inflation Slows to Year-Low as Central Bank Mulls Easing

Czech December inflation decelerated to the slowest pace in a year, bolstering the case for a more relaxed monetary-policy stance as the central bank debates whether to start selling the koruna.

The inflation rate dropped to 2.4 percent, from 2.7 percent in November, the Czech Statistics Office in Prague said in a statement on its website today. The reading matched the median forecast in a Bloomberg survey of 15 analysts and was below the central bank’s 2.8 percent estimate for the month. Consumer prices rose 0.1 percent in December.

The Czech economy is showing weak domestic demand as households and businesses cut spending due to government austerity programs and the euro area’s debt crisis. The central bank is in uncharted territory after cutting the benchmark rate to effectively zero, while several policy makers have mentioned selling the koruna as a way to to further relax conditions as the economic recession risks stretching into the longest ever.

Data should be “significantly anti-inflationary, and we can expect more pressure on the koruna,” Jana Malickova, an analyst at Komercni Banka AS (KOMB) in Prague, said by e-mail yesterday.

Gross domestic product shrank for a third three-month period from July to September, matching the longest quarterly declines recorded three years ago and in 1997, according to the latest data from the statistics office.

Zero Rates

The Ceska Narodni Banka held the main two-week repurchase rate at 0.05 percent, almost three-quarters of a percentage point less than the euro-area benchmark, at a board meeting Dec. 19. The bank will keep rates at a “technical zero” until it sees a significant increase in inflationary pressures, Vice- Governor Vladimir Tomsik said last week.

Selling the currency is the next preferred policy tool because of the “proven and quick reaction by the economy to a depreciation of the koruna exchange rate,” Tomas Holub, the head of the central bank’s monetary and statistics department, wrote in a column for the Euro magazine posted on the central bank’s website on Dec. 3.

The koruna has lost 4 percent against the euro since Sept. 17, one day before Governor Miroslav Singer first said the central bank may use sales of the currency to ease monetary conditions. That’s the third-worst performance among major emerging-market currencies tracked by Bloomberg in the period.

The koruna is now weaker than the central bank’s forecast and the monetary authority probably won’t start selling the currency around current levels, according to CSOB AS.

“It wouldn’t be an easy transition for the CNB from verbal interventions to real action,” CSOB said in a Jan. 8 report.

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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