By Sean Carney (Dow Jones Newswires, 19.3.2012)
Upward pressure on Czech consumer prices is weak amid a period of economic stagnation, while recently higher-than-expected headline inflation should subside, the Czech central bank's vice governor said late last week.
"[I] don't see any inflationary pressures coming from the demand side of the economy," Vladimir Tomsik said less than two weeks ahead of the central bank's policy meeting on March 29.
While Tomsik won't commit to how he'll vote next week, his comments indicate there is little pressure to tighten monetary policy and that the Czech central bank may again be able to leave its benchmark interest rate unchanged at the historic low of 0.75%, where it's been since May 2010.
A probable result of such views is that the central bank will maintain loose monetary policy in the foreseeable future, as any tightening would stifle the already weak economy which contracted on a quarterly basis in the third and fourth quarters of last year.
Headline inflation spiked to 3.5% on the year in January and to 3.7% in February from a more tame 2.4% in December.
Tomsik said the central bank expected the acceleration but the size of the jump was surprising. Yet he remains cautiously dovish, saying a Jan. 1 increase in value added tax from 10% to 14% and higher oil and food prices fueled the rise.
Tomsik pointed out that in February monetary-policy relevant inflation, which excludes variations due to tax changes as well as those from volatile oil and food prices, was about 2.5%, remaining in the central bank's 1% to 3% target inflation range.
"If current monetary-policy inflation is in the upper range of the band, I don't see any risk," he said, adding that he expects this measure of price developments to move towards the bank's 2% midpoint target by the end of this year.
Tomsik said he believes inflation expectations are well anchored, which should discourage further inflationary acceleration.
Pressure on prices should actually ease in coming months thanks to weak household demand for consumer goods due to persistent economic uncertainty and to the Czech koruna gaining against the euro and dollar which lowers import costs.
"The economic environment [with meager wage growth and weak consumer demand] will not allow still-growing prices for food. We [may] see in a few weeks or a few months that the prices of food will start decreasing; demand will not support current prices...and sellers of food will take this into account," Tomsik said, calling recent price hikes an overshoot.
Tomsik emphasized the Czech currency's recent gains, saying: "Koruna appreciation has resumed, based on the data."
The koruna traded Friday at 24.51 to the euro, well down from 26.025 in late November, the Czech currency's low point after a bout of weakening through late summer and autumn last year.
What's more, planned Czech budget cuts would further weaken demand and would be disinflationary, while the proposed tax hike would pose an additional crimp on consumer demand, he noted.
Due to falling tax revenues amid the economic slowdown, the Czech government is considering further budget cuts and an additional one percentage point hike to value added taxes.
However, Tomsik pointed out that these measures haven't yet been approved by government so haven't been factored into the central bank's official outlook.