Monday, 21 April 2014

Inflation set to fall further

11 December 2012

Prague, Dec 10 (CTK) - Inflation in the Czech Republic will probably be falling further despite the planned VAT increase as of next year so the central bank CNB can continue its loose monetary policy, analysts addressed by CTK said.

Interest rates will thus most likely not be raised for the whole of next year.

The growth in consumer prices slowed down to 2.7 percent yr/yr in November from October's 3.4 percent and inflation thus for the first time this year fell below the 3 percent level. Month on month, prices dropped by 0.2 percent.

"The falling trend should continue also in the coming months despite the increase in both VAT rates. The impact of this change will be weaker than this year's change in the lower VAT rate from 10 to 14 percent," said Patria Finance chief economist David Marek.

Marek expects inflation to move between 2 and 3 percent in the whole of next year. This fact combined with a deeper recession raises pressure on the central bank to further ease the monetary policy.

"Seen the fact that interest rates are at zero, it means growing pressure for the use of forex interventions," he added.

Next Finance analyst Vladimir Pikora also thinks that the price growth will be slowing down in the first half of 2013.

"In the first half, I expect return to less than 2 percent," he said, adding that in the second half of 2013, inflation will grow again.

The central bank thus can continue practicing a very loose monetary policy and compensate the negative impact of the budget restriction on the domestic economy, said Komercni banka analyst Miroslav Frayer.

"If the deflation pressures get even stronger, we expect the central bank to attempt to ease the monetary policy further through the exchange rate channel. yesterday's data thus clearly speak in favour of a weaker crown," he noted.

yesterday's data are an argument for forex intervention also for Ceska sporitelna analyst Martin Lobotka. Nevertheless, he believes that the effect of such step for the domestic economy will not be too big.

"On the one hand, a weaker crown should help the industry. However, in the environment of falling demand from the euro zone, even a weak crown does not necessarily have to help too much," Lobotka noted.

"On the other hand, a weaker crown will raise import prices, which will further dampen household demand. The net gain for the CNB in our opinion will not be too big but the CNB has not too many other options than to sit through the current situation," he explained.

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