Czech central bank sees local reasons to be cheerful

Photo: archive of Radio Prague

The Czech national bank says Europe’s fragile growth and sharply falling prices for commodities means that inflationary pressure has ebbed even further. But the economy is still seen performing strongly based on greater local demand, rising wages and lower unemployment.

Photo: archive of Radio Prague
The Czech National Bank (ČNB) published its quarterly inflation report Friday. The report is important because it provides the key statistics and predictions on which the bank board will be making its decisions over the next three months until the next report comes along.

Given that interest rates are at near zero levels and expected to stay that way in the short term, the boards biggest task is inflation watching and deciding whether the exit date from its low crown policy – already put back to the second quarter of 2016 – should be delayed again.

Just a reminder here that moderate inflation is usually seen by economists and central banks as a good thing since it encourages people to go out and buy things and consume, thus boosting the economy, while lower prices mean they hold onto their money and wait for goods to become even cheaper.

The national bank took the dramatic step of launching currency interventions just over a year ago in November 2013 to head off the danger of deflation and weakened economic growth. The interventions set a target for the crown to weaken to 27 crowns/euro a goal which was more than achieved with an average of around 27.5 crowns/euro over the last 12 months.

So far, prices have failed to bounce back significantly although the Czech economy is unquestionably on the road to recovery. According to the bank report, inflation has averaged at just 0.7 percent since the currency intervention was launched compared with 1.0 percent before the move.

The nutshell message from the bank’s latest report is that inflationary pressure is still very weak with the hesitant recovery in the Eurozone and lower commodity prices worldwide even weakening any upward move in prices since the previous analysis was penned in August. The fact is that the prices of goods leaving factory gates in the Eurozone are expected to fall by 1.6 percent this year. They should rise by 1.1 percent in 2015 and by 2.2 percent in 2016. Commodity prices are expected to remain weak through 2015.

With external factors failing to push prices higher significantly higher in the short term, it is therefore to the domestic Czech economy where the bank is fixing its inflationary hopes. On the domestic front, the national bank already sees domestic consumption and not exports to the Eurozone as the biggest factor already fuelling higher overall demand in the economy. Economic growth is expected to turn in at 2.5 percent this year and in 2015 before speeding up to 2.8 percent in 2016.

One major factor in that revival of domestic demand are wage rises in both the private and public sectors after the recent years of low, or even falling real values of wages and consumer spending power. Wages in the private sector of the Czech economy are expected to climb by 3.2 percent this year and continue upwards to 3.8 percent in 2015 and 4.8 percent in 2016. Wages in the public sector will trail slightly behind – as is normal in most economies – but still average out at 2.9 percent this year, 3.2 percent in 2015 and 2.5 percent in 2016. What’s more, unemployment should continue to fall, meaning further spending power in the economy and another feel good factor boost all round.

An interesting aside in the report is the bank’s conclusion that EU sanctions against Russia and the Ukraine crisis will have a limited impact on the Czech economy – though that’s not to say that some individual firms might be suffering seriously. Exports could fall to the tune of 1 billion crowns this year and by 2 billion crowns in 2015, the bank warns. And the crisis could shave 0.4 percentage points off the economic growth that could have been expected otherwise in 2015 and 2016.