Sept. 7 (Bloomberg) -- The Czech economy continued to shrink in the second quarter after households and the government reduced spending, as the second recession since 2009 bolsters the case for cutting interest rates further.
Gross domestic product fell 0.2 percent from the previous quarter, the third consecutive contraction, compared with a revised 0.6 percent decline in the first three months of the year, the Czech Statistics Office said in a statement on its website today. GDP fell 1 percent from a year ago.
The Czech economy is suffering from weak domestic demand as the government cut investments and raised sales taxes to trim the budget deficit. while a foreign trade surplus remains, the euro-area’s debt crisis has curbed purchases of electronics and cars. The 27-nation European Union buys 80 percent of Czech exports including from companies such as carmaker Skoda Auto AS.
Today’s data “strengthened our expectation that the next monetary-policy step will be a reduction in the key interest rate by 25 basis points to 0.25 percent, most likely as early as at the next policy meeting at the end of September,” Vaclav France, analyst at Raiffeisenbank AS in Prague, said in a note.
Czech forward-rate agreements fixing the three-month interbank rate in three months fell to 0.58 percent today from 0.89 percent before the last rate meeting on Aug. 2. The three-month Prague interbank offered rate, or Pribor, was 0.89 percent today.
Household spending and government consumption both fell 1.1 percent in the second quarter from the first three months, according to the statistics office’s data.
The annual and quarterly “drop in overall demand was contributed to mainly by final consumption expenditure, and within that, it was mainly expenditure of households,” the office said in the statement.
Policy makers were split at their last meeting in assessing the effect of tax increases on inflation and risks stemming from the debt crisis. Two rate setters sought a quarter-point reduction after the bank cut its two-week benchmark to a record-low 0.5 percent in June, while four voted for no change even as the bank’s forecast saw lower rates amid a worsening economic outlook.
Household spending fell more than the central bank had forecast for the second quarter, the Ceska Narodni Banka, or CNB, said in a statement after the data release. It forecasts GDP will contract 0.9 percent in the full year 2012, before rebounding to 0.8 percent growth next year.
“The published data represent a downside risk to the CNB’s prognosis of developments in domestic economic activity,” the bank said.
The monetary-policy outlook is clouded by a dispute within the ruling coalition on whether to cut the budget deficit with higher taxes. Lawmakers rejected this week a government bill to increase the sales levy and impose a new tax bracket for high earners, forcing the Cabinet to link the legislation to a confidence vote later this year.
The central bank had included the effects of the package in its latest forecast, expecting the measures to continue depressing consumer demand next year and tame inflation.
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