Czech food prices may rise up to 8 percent as a result of weak crown

The central bank’s decision to launch forex interventions against the crown last November have won Miroslav Singer the title European central banker of the year by the Financial Times group monthly The Banker, but many Czech producers remain unconvinced it was the right move and consumers fear significant price rises in the coming months.

Photo: CTK

The currency intervention to weaken the crown is aimed at revitalizing the economy while still keeping inflation near the bank’s 2 percent target. But while most exporters are overjoyed it has not received a unanimous round of applause on the home front.

A survey among entrepreneurs conducted by the ČSOB bank indicates that 60 percent of them fear the interventions will harm their business interests. The impact of a weaker crown is expected to hit mainly importers and manufacturers who import commodities for their end-products, for instance bread and pastry producers.

Economists are warning that the goal of boosting the country’s export-driven economy will only work if it is maintained long-term. According to Zbynek Frolik, a board member of the Czech Confederation of Industry, the benefits of a weaker crown will not materialize in the immediate future. He says that after years of a strong currency many exporters protected their interests by paying their suppliers in euros not crowns. The strength of the Czech currency is moreover just one of the factors influencing Czech producers’ competitiveness on foreign markets. Mr. Frolik says that for exporters to feel the benefits the crown would have to stay weaker for a number of years.

The Czech National Bank has said it will stick to its low crown target for at least a year but will still keep an eye out for the inflationary implications.

Many companies importing commodities for goods selling on the home market are already feeling the squeeze. According to the Association of Food Producers rising costs are forcing some food companies to cut their profit margins. Those which can ill-afford further reductions fear they may eventually have to cut production and lay-off workers. Even though many companies had secured fixed exchange rates of the euro and the dollar for their transactions in advance, they are reckoning with a loss because long term contracts for imported commodities have been denominated in crowns.

Photo: Filip Jandourek

Other producers though have reason to cheer. Milk and dairy producers –whose production is largely slated for export – say are expecting a highly positive impact. And after years of losing out to cheaper meat imports from EU member states, Czech farmers now have a better chance of selling their goods on the home market. Meat processing companies have already limited pork imports and are buying more from local producers.

The overall outlook for consumers is less rosy. While people are not yet forking out significantly more for their week’s groceries an increase in the price of many food stuffs appears unavoidable. Imported food products will automatically be more expensive and home-made goods as well if imported raw materials feature significantly in the production chain. For instance higher grain prices will raise the price of fodder which will further increase the price of meat, meat products and eggs. According to the bleakest estimates of the Association of Food Producers, consumers can expect an increase in the price of food products of between 5 and 8 percent.