Tuesday, July 08, 2008

Czech Inflation Drops Slightly in June 2008

Czech inflation slowed again slightly in June as the strong koruna helped to keep the rate down, giving the central bank room to delay further interest rate increases at this point. The inflation rate fell to 6.7 percent from 6.8 percent in May, the Prague-based statistics office said in a statement today. The inflation rate has now been dropping steadily since touching a nine year high of 7.5% in January and February. This months result is in line with the central bank's forecast, although it is still significantly above its 3 percent mid-point target. Month on month consumer prices rose 0.2 percent from May.

Today's report confirms central bank expectations that inflation may return to within the target range by early next year without any additional rate-lifting on top of eight in the past 2 1/2 years, to 3.75 percent. The koruna, which has risen by 21 percent against the euro and 41 percent against the dollar in the past year, maintained these gains even after the European Central Bank raised its benchmark rate to 4.25 percent last Thursday.

Prices of clothing, cars and some electronics fell on the month, while food stagnated from May and added 10.4 percent year on year. Cigarette prices and alcohol rose 0.2 percent from the previous month as producers and retailers began to run out of stocks accumulated before excise tax on tobacco was raised.

The price of motor fuels grew 3.3 percent in the month, reflecting a 10.1 percent jump in global oil prices in June on top of a 34 percent growth in the first five months of 2008.

The central bank expects the inflation rate to slide to its targeted range of 2 percent to 4 percent at the beginning of next year as a result of the koruna strengthening, a mitigating effect of one-time influences such as increases in indirect taxes and regulated costs wane and a faltering consumer spending.

That outlook suggests stable interest rates in the months to come and even the possibility of a reduction before the year's end, as suggested by the central bank's staff forecast from early May. The koruna may even allow policy makers to lower rates more than previously indicated minutes from the central bank's June 26 policy meeting indicate.

``Given the current exchange-rate trend, the implied interest rate path of the August forecast might be even lower than that of the May forecast,'' the bank said in the minutes, released on July 4. Decision makers next meet on Aug. 7 to set rates and to publish a new quarterly inflation prediction.

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