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Czech Inflation Unexpectedly Slows, Supports Rates Stability

Czech June inflation unexpectedly slowed to less than the central bank’s 2 percent target, which may support arguments for keeping interest rates at a record low as policy makers debate when to begin raising borrowing costs.

The inflation rate dropped to 1.8 percent from 2 percent in May, the Statistics Office in Prague said today on its website. The median forecast of 18 economists in a Bloomberg survey was 2.1 percent. Consumer prices fell 0.2 percent in June. Lower food and non-alcoholic beverage costs were the main factor in bringing the rate down, the office said.

The Ceska Narodni Banka has kept the benchmark two-week repurchase rate at 0.75 percent since May 2010 as central banks across Europe raised interest rates to curb inflation. Two board members voted for a quarter percentage-point increase on June 23, with five voting to keep borrowing costs stable.

“It’s clear that inflation won’t rise significantly above 2 percent in the coming months,” said Patrik Rozumbersky, an analyst at UniCredit SpA in Prague. “We consider thoughts of raising interest rates in August to be over after June inflation.”

While the result was 0.1 percentage point above the central bank’s forecast, the development of price growth is in line with the bank’s overall outlook, it said in a statement posted on its website.

The bank is weighing differing signals from the economy as growth accelerates, while state spending cuts curb domestic demand, according to the minutes of June’s rate-setting meeting.

Weak Demand

Some policy makers said domestic demand was weak and economic growth driven by exports wasn’t creating inflation pressures because it strengthens the koruna and tames prices, the minutes showed, without identifying the speakers. Others said the current recovery marked the start of stable economic growth, which may be an inflationary risk.

Policy makers in May moved forward their forecast for a rate increase, saying it will probably take place in the fourth quarter of this year rather than the first quarter of 2012.

Investors scaled back bets on higher interest rates after the June inflation data, with forward-rate agreements locking in three-month interest rates in six months dropping to 1.52 percent from 1.54 percent yesterday. The three-month Prague interbank offered rate was 1.19 percent. The Czech koruna was little changed against the euro at 24.264 as of 4:18 p.m. in Prague.

The central bank will hold its next policy meeting Aug. 4, when it will also present new quarterly economic forecasts with an indication of the interest-rate path.

A lack of inflationary risks combined with the expected economic slowdown and risks related to euro-area debt problems “are speaking in favor of stable interest rates,” David Marek, chief economist at Patria Finance as, a Prague-based brokerage owned by KBC Groep NV, said in a report to clients.

“We expect a rate increase may occur in the final three months of the year, and only if the European debt crisis doesn’t escalate further,” Marek said.

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