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Czech Prices Defy Deflation Forecasts
World Economy

Czech Prices Defy Deflation Forecasts

Czech consumer prices rose in February, defying forecasts that the economy would slide into deflation for the first time since 2009 as the central bank defends its weak-koruna policy.
Consumer prices rose 0.1 percent last month from a year earlier, the statistics office in Prague said in a statement. That matched January’s result and compared with a median estimate of a 0.1 percent fall in a Bloomberg survey of 10 analysts. The index rose 0.2 percent on a monthly basis. The Czech National Bank targets inflation at 2 percent.
The threat of deflation risks is deepening a dispute between the bank and President Milos Zeman, who has repeatedly criticized the policy makers’ decision in 2013 to weaken the koruna and cap future gains at about 27 per euro to prevent falling prices from hurting the economy. The currency gained toward the limit last week, after the Prague-based newspaper Pravo reported that Zeman promised to appoint central bankers who will “rectify the wrong” policy.
“Higher-than-expected inflation, along with declining unemployment in February, may boost the koruna a little,” Michal Brozka, chief analyst at Raiffeisen Bank International AG’s unit in Prague, wrote in a report. “With respect to rising fuel prices, it’s likely that we’ll see the inflation rate slowly rising in coming months.”

 Cap Helps
February inflation was driven by increases in tobacco and housing prices, the statistics office said. Rate setters have repeatedly said the currency policy has prevented an economically damaging slump in prices and they are ready to weaken the koruna further if necessary. The bank has said no immediate policy reaction is needed to counter the direct impact of the declining oil price on inflation.
Annual inflation was “slightly” above the central bank’s forecast in February, the regulator said in comments published on its website Monday. The data confirmed that the koruna cap helped avert the threat of deflation, it said.
“The overall upward pressures on consumer prices are currently fading, as the decline in producer prices in the euro area combined with the fall in the global prices of energy commodities are leading to a reduction in costs arising from import prices,” the central bank said in the statement.
The koruna gained 0.3 percent to 27.258 a euro as of 1:02 p.m. in Prague.
The central bank won’t ditch the cap before October next year, according to 11 of 13 economists polled by Bloomberg on Feb. 20-25, including five who see the policy extended until 2017. Two predicted an exit in the third quarter of 2016.
In other data, Czech foreign trade showed a 17.3 billion koruna ($689 million) surplus in January. That compared with a median estimate of a 16.8 billion koruna surplus in a survey of eight analysts.

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