Friday, February 08, 2008

Czech Inflation January 2008

Czech consumer prices jumped a much faster than expected 3.0 percent month on month in January, pushed up to some considerable extent by government tax and health cost increases, putting strong pressure on the central bank to make further increases in a base interest rate that they only raised yesterday.

The Czech Statistical Bureau said on Friday the jump put year-on-year inflation at a nine-year high of 7.5 percent, sending the Koruna up to yet another new record high as currency traders started to bet on future rate rises. The market had expected a 1.9 percent monthly rise and a 6.2 percent annual price rise. The statistical bureau said nearly all of the January rise -- 2.9 percentage points -- could be attributed to the administrative measures.

The government raised value-added tax in January on basic items such as food to 9 percent from 5 percent, and also introduced a fee of 30 crowns ($1.71) for a doctor's visit. The price of electricity advanced 9.5 percent while natural gas was 7.8 percent more expensive. State-controlled rents jumped 18.9 percent from December, the authority said.

New health-care regulatory fees made up 0.5 percentage point to the overall monthly price index while food prices were 2.3 percent higher in the month, led by fruit, vegetables, meat and dairy products.

The inflation data followed a 25 basis point interest rate increase to 3.75 percent on Thursday, which still left rates well below the inflation rate.

The koruna rose to 25.668 per euro as of 1:15 p.m. in Prague from 25.715 before the data was released and from 25.756 in yesterday's late trading.

The ask yield on the government 10-year bond climbed 4 basis points to 4.48 percent. The price fell 0.3, or 30 koruna per 10,000 koruna ($565) face amount, to 100.95, according to Ceska Sporitelna prices. A basis point is 0.01 of a percentage point.

The central bank said in its quarterly forecast published yesterday that it expects inflation to reach 5.3 percent in the fourth quarter of 2008, before it falls to 2.4 percent in the second quarter of 2009 on anticipation that inflation will return to the target next year once temporary costs and administrative shocks start dropping out of the price index later in the year. The key issue now is, of course, the possibility of second round effects in the shape and form of wage rises, and the danger is that a dynamic may be set in motion which will be hard to put a brake on, especially given the tightness in the labour market, the inward movement of funds which will accompany any sustained raising of interest rates, and the availability of cheaper euro denominated currency loans at cheaper rates should the ECB start to head south just as the Czech central bank keeps heading north. In other words what has been a fairly benign win-win situation with interest rates and the Koruna up to now could very easily invert into a lose-lose dynamic.

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