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Wednesday, March 19, 2003

Deflation Alive and Well in the Czech Republic

Many observers seem to treat deflation as if it were a problem which was exclusively focused on Japan. In fact the problem is much more generalised, and seems to be spreading rather like that horrible pneumonia problem. Today some news from the Czech Republic. The seasoned deflation observer will note that the principle pillars of policy are increasing the government debt (which rose by a staggering 18% of GDP last year, provoking sharp criticism from the IMF) and lowering the value of the currency. Neither of these lines of attack would be open to the Czechs were they, at some future date, to enter the euro.

Czech consumer prices grew 0.2 % month/month and fell 0.4 % yr/yr in February, reports the Czech Statistical Office (CSU). In February, prices of food, clothing and household equipment fell, while other items in the CPI basket rose in month/month comparison. The main factors behind the month/month price increase in February were increased prices for recreation and culture (1.0 %) and transport (up 0.5 % due to a 2.3 % rise in fuel prices). Housing prices rose 0.3 %, while telecommunications added 0.9 %. On the other hand, food prices fell 0.3 % and clothing and footwear prices went down 1.0 % in February. As in January, the yr/yr fall in prices was influenced by decreases in consumer prices of food and non-alcoholic beverages (down 6.0 %), clothing and footwear (down 4.8 %), natural gas (down 11.4 %), electricity (down 4.7 %), says the CSU. "In the next months, prices of fuel and transport will continue to grow," predicts Komercni banka (KB) chief analyst Kamil Janacek. "Also there will be a reversal in the declining trend of food prices." He expects inflation to be just under 2 % at the end of 2003. Prices in 2Q 2003 will be compared to the relatively low base created in the second quarter of 2002, says Radomir Jac of Commerzbank Capital Markets, adding to the factors driving annual CPI inflation higher. Analysts believe deflation could continue until March or April. At the end of January, the Czech National Bank (CNB) reduced its rates by 0.25 bps, bringing the key two-week repo rate to 2.50 %, or 0.25 points below eurozone levels. Low inflation was the main argument for the cut. If the low inflation continues, Miroslav Brabec of Raiffeisenbank expects another 25 bp rate cut in anticipation of further monetary easing by the European Central Bank (ECB). The Czech crown firmed to below CZK 31.80/EUR Monday morning following the release of inflation data.
Source: Interfax Czech Republic

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