Czech Inflation Slowest in 2012 as Central Bankers Mull Cut

Czech inflation was the slowest in five months in May as policy makers discuss whether to cut interest rates with the economy struggling to exit a recession.

The inflation rate dropped to 3.2 percent from 3.5 percent in April, the Czech Statistics Office in Prague said on its website today. The reading was higher than the 3.1 percent median forecast of 18 analysts in a Bloomberg survey. Consumer prices rose 0.2 percent from the previous month.

Price growth has exceeded the central bank’s 2 percent target for eight months as the government increased the sales tax to boost budget revenue. The economy’s contraction deepened in the first quarter, with falling domestic demand outweighing rising exports as households cut spending.

“The central bank is likely to welcome May inflation data, as price growth is slower than what the Czech National Bank expected in its quarterly forecast and structure of the data confirms absence of demand-led inflationary pressures in the economy,” Radomir Jac, chief economist at Generali PPF Asset Management in Prague, said in an e-mail.

Unchanged Rates

The central bank left the benchmark two-week repurchase rate at a record-low 0.75 percent on May 3, keeping borrowing costs steady since a cut in May 2010. Two rate setters, including Governor Miroslav Singer, sought a cut in May, while four voted for no change and one wanted an increase.

The koruna was little changed at 25.410 to the euro as of 12:58 p.m. in Prague.

The May inflation rate was 0.2 percentage points lower than forecast, the central bank said in a statement. Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, eased to 2 percent in May, matching the bank’s target.

The data confirm “anti-inflationary effects of domestic economy,” the bank bank said.

The government raised the lower bracket for the value-added levy on goods and services including food, drugs and public transport, to 14 percent from 10 percent starting in 2012. Inflation began to accelerate in the final quarter of last year as businesses raised prices before the tax increase took effect.

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