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Czech Central Bank Cuts GDP Outlook, Sees Drop in Market Rates

The Czech central bank cut growth forecasts for this year and next and sees a decline in market interest rates as early as this year as the export-led economy battles the effects of decelerating growth in the euro area.

Policy makers forecast gross domestic product to add 2 percent this year, compared with its last forecast of 2.1 percent. The economy will grow 1.2 percent in 2012, the central bank said, compared with its last forecast of 2.2 percent.

Downside risks to the central bank’s forecast include slower wage growth and a “substantial” deterioration in growth abroad and a further decline in the outlook for commodity prices and three-month interbank rates in the eurozone, or Euribor. Upside risks to the central bank’s outlook include a weaker koruna exchange rate.

“Consistent with the forecast is a slight decline in market interest rates at the start of the forecast and flat rates until late 2012/early 2013,” the central bank said in its report today. “Inflation pressures from the domestic economy are currently not significant, commodity prices and food prices are still the main source of inflation.”

Inflation is forecast to be 2.8 percent in the fourth quarter next year, slower than the forecast of 3.2 percent made in the last report. Inflation will reach 1.6 percent in the first quarter of 2013, the central bank said.

Policy makers also offered an “alternative” scenario for inflation and growth in today’s report based on the possibility economic growth in the euro-area slows to “almost zero” next year and has a negative effect on the Czech economy.

Under the “alternative,” GDP is seen growing 1.9 percent this year and contracting 0.4 percent in 2012.

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