Czech Inflation May Point to More Policy Easing

Czech September inflation was probably below the central bank’s forecast for a sixth month as household consumption weakened, which may trigger more monetary policy easing after an interest rate cut to a record low.

Consumer prices grew 3.4 percent from a year earlier, the median forecast of 14 economists in a Bloomberg survey showed, compared with the central bank’s 3.5 percent estimate. August inflation was 3.3 percent because of factors outside the influence of monetary policy, including a sales-tax increase and global commodity costs. The data will be released tomorrow at 9 a.m. in Prague.

The Czech economy is suffering from weak domestic demand after the government cut investments and raised sales taxes to trim the budget deficit. The central bank cut the benchmark interest rate to a record-low 0.25 percent on Sept. 27 and said it may weaken the koruna if it needs to ease monetary policy further.

“Czech household consumption remains weak and the development is consistent with the pessimism seen in consumer confidence surveys,” Radomir Jac, chief economist at Generali PPF Asset Management in Prague, said in an e-mail after data released on Oct. 5 showed that retail sales fell 0.8 percent in August. “Any significant improvement does not seem likely for months and quarters to come,” he said.

Fighting Crisis

Monetary authorities in eastern European Union members are following central banks in the U.S. and U.K. in policy easing to address an economic slowdown as Europe fights a sovereign-debt crisis.

The Czech koruna traded at 24.895 per euro as of 9:07 a.m. in Prague, little changed from the close on Oct. 5, according to data compiled by Bloomberg. Yields on 1-year bonds dropped two basis points, or 0.02 percentage point, to 0.378 percent, according to generic data compiled by Bloomberg.

Hungary’s central bankers lowered the two-week deposit rate to 6.5 percent from 6.75 percent in September, the second reduction in two months. Poland’s central bank signaled it may cut borrowing costs next month if the economy slows further after unexpectedly leaving the main rate at 4.75 percent on Oct. 3.

While the trade balance remains in surplus, the debt crisis has curbed purchases of electronics and cars. The 27-nation EU buys 80 percent of Czech exports, including from companies such as carmaker Skoda Auto AS.

Economic Contraction

Czech gross domestic product declined 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, as consumers responded to the worsening economic outlook by spending less.

The median forecast in a Bloomberg survey of 12 analysts was for a 0.1 percent decrease in prices from the previous month, which would be the third such decline in a row.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 2 percent in August, matching the central bank’s target. The bank forecasts the monetary-policy inflation rate at 2.2 percent in September and sees it at 1.5 percent in the third quarter of next year.

The Czech economy lacks “inflationary pressures” and the only reason for a headline inflation rate above the central bank’s target is the sales tax increase, Danske Bank A/S analysts said in an Oct. 4 note.

“With the Czech central bank’s failure to react to what is effectively deflationary pressures, we would expect a further decline in Czech inflation in coming months,” according to the report. “Unfortunately, the CNB has been extremely slow in reacting to deflationary pressures and as a result the Czech economy remains trapped in recession.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE