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Slowing Czech Inflation Bolsters Case for Koruna Sales

Czech inflation unexpectedly slowed in July on food prices, bolstering arguments for koruna sales and weakening the stance of central bankers opposed to starting the first interventions in a more than a decade.

The koruna weakened after data showed consumer prices rose 1.4 percent from a year earlier, after a 1.6 percent increase in June, the Czech Statistics Office said in a statement today. It was below the 1.6 percent median estimate in a Bloomberg survey of 15 analysts and lower than the central bank’s 1.7 percent forecast. Prices fell 0.2 percent from a month earlier.

After three rate cuts last year exhausted room for traditional monetary easing, inflation is below the Ceska Narodni Banka’s target. With the country suffering a record recession, prospects are increasing for the first currency interventions since 2002. Rate setters are split over whether to start koruna sales now or wait for deflation risks to appear.

“In the context of weak numbers of domestic economic activity, today’s data support the advocates of currency interventions to weaken the koruna,” Patrik Rozumbersky, an analyst at the Prague-based unit of UniCredit SpA, said by e-mail today. “The probability of their happening has increased.”

The koruna depreciated as much as 0.3 percent to the euro today, trading at 25.867 as of 1:44 p.m. in Prague. It has lost 5.2 percent since Sept. 17, the day before central bank Governor Miroslav Singer first signaled the bank may sell the currency.

Untested Ground

The central bank is on untested ground with rates at zero, inflation running below target, and a recession that undercut the $196 billion economy in the six consecutive quarters through March. The koruna has moved to the center of policy deliberations because depreciation would help boost the competitiveness of exports and make imports more expensive.

The bank’s board rejected a motion on Aug. 1 to start koruna sales because several policy makers didn’t see the risk of deflation, minutes of its last monetary meeting showed.

While most policy makers agreed that the probability of starting the interventions has increased, some argued doing so may destabilize the economy, according to the minutes published on the bank’s website today.

“Several of the board members repeatedly spoke in favor of immediately commencing foreign-exchange interventions,” the bank said in the minutes. “However, it was noted several times that given the uncertainty about the economic consequences of foreign exchange interventions, it was appropriate to wait for a potential greater accumulation of anti-inflationary pressures or for the risk of deflation.”

Mixed Signals

The economy is sending mixed signals that are clouding the outlook, according to the minutes. Retail sales and industrial output fell more than analysts estimated in June. The foreign trade surplus widened as exports fell less than imports, statistics office data showed.

Price growth relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.7 percent in July, from 0.9 percent in the previous month. It stayed below the central bank’s 1 percent to 3 percent tolerance band, the bank said in a statement today.

The board, which left the benchmark interest rate unchanged at 0.05 percent for a sixth meeting on Aug. 1, also voted on starting the interventions for the first time. It didn’t publish the breakdown of the vote, which was unsuccessful.

While July inflation may serve as an argument to policy makers who want to intervene interventions, “the impact of single data should not be overestimated and more information about developments in both the Czech and global economy will come before the central bank board convenes next time in late September,” Radomir Jac, the chief analyst at Generali PPF Asset Management AS, said in a note to clients today.

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