Czech Inflation Slowest in 18 Months Amid Record-Long Slump

Czech consumer prices rose at the slowest pace in 18 months in February as the central bank debates whether the longest economic recession on record warrants more monetary-policy easing.

The inflation rate dropped to 1.7 percent from 1.9 percent in January, the Czech Statistics Office in Prague said in a statement today. The reading was less than the median forecast of 1.8 percent in a Bloomberg survey of 18 analysts and below the central bank’s 2 percent estimate for the month. Consumer prices rose 0.1 percent on the month, the office said.

The $217 billion economy is suffering from weakening domestic demand, with households and businesses spending less due to government austerity measures and the euro area’s debt crisis. After cutting borrowing costs three times last year to effectively zero, the central bank is navigating uncharted territory as Governor Miroslav Singer said the bank’s forecast shows further policy easing will be probably needed this year.

“Demand inflation is non-existent in the Czech economy and inflationary pressures aren’t coming from the labor market either,” Jiri Skop, an economist at Komercni Banka AS in Prague said, in an e-mail.

Fourth Contraction

The deviation from the central bank’s forecast was caused mainly by a lower-than-expected increase in energy costs for households, the central bank said in a statement on its website. Food prices also rose at a slower pace than the bank had forecast, it said.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.9 percent, compared with 1.1 percent in January and below the central bank’s 1 percent to 3 percent target band.

“The published data signal a slight anti-inflationary risk for the current CNB forecast,” the central bank said.

Gross domestic product shrank 0.2 percent from the third quarter of 2012, marking the fourth consecutive quarterly decline, the Prague-based Czech Statistics Office said in a final report today. The reading was in line with a flash estimate published Feb. 14. Output fell 1.7 percent from the final quarter of 2011, the steepest drop in three years.

‘Deeper Weakening’

“The new data represent a risk toward somewhat deeper weakening of economic activity,” the central bank said.

On a quarterly basis, gross fixed capital creation fell 3.8 percent, while foreign trade showed negative contribution as exports fell more sharply than imports, the statistics office said.

Household consumption rose 0.9 percent in the final three months, the first quarterly increase last year. Household spending fell 3.5 percent in the full year, the first decline since 1998, according to the statistics office data.

“While we expect it to decline further this year, the pace of the decline should be already much softer and we actually expect household consumption to show a slight year-on-year increase in the final quarter of 2013,” Radomir Jac, the chief analyst at Generali PPF Asset Management in Prague said.

Koruna Weaker

The koruna weakened 0.6 percent to trade at 25.565 to the euro as of 12:58 p.m. in Prague today. It has lost 4 percent against Europe’s common currency since Sept. 17, a day before Singer first said the central bank may use currency sales to ease monetary conditions, according to data compiled by Bloomberg.

The central bank, which targets inflation, left the two-week repurchase rate at 0.05 percent for a second meeting on Feb. 6, almost three-quarters of a percentage point less than the euro-area benchmark.

“All in all, we think that the Czech central bank will not change its policy stance and will remain happy if the crown remains at or even above the level of 25.50 versus the euro in the weeks and months to come,” Jac said in e-mailed comments.

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