Czech National Bank revises economic outlook

The Czech National Bank has revised its economic outlook for this year and 2002. While the Central Bank predicts a slightly higher GDP growth, it is worried about growing inflationary pressures. Originally, the Central Bank expected the end-year net inflation to be within 2 to 4 percent, however it now expects levels to be between 3.5 to 4.4 percent. Vladimir Tax spoke to Ales Capek, the executive director of the monetary department of Czech National Bank about the main factors behind this development.

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"There are three main reasons for the revision of the inflation forecast. One reason is the current development of prices of foodstuffs which accelerated during the past several months. The second reason is a revision of the general macroeconomic framework for price development in the nearest future or in the medium term. And the third main reason was the revision of some of exogenous variables which enter into the inflation forecast, I mean mainly the exchange rate, the price of oil..."

Can you elaborate on that a little bit?

"As I have mentioned, one of the main current inflationary pressures comes from the segment of prices of foodstuffs. For instance, between January this year and June this year, the inflation of prices increased by roughly 3 percentage points, which represents quite a dramatic increase of inflationary pressures in this group of prices. The second main inflationary pressure comes from the generally expansionary macroeconomic environment which we can observe at the moment."

Last Friday, the Czech National Bank increased the interest rates. Was this measure aimed at getting inflation back to the original target range?

"Yes. It was in a way a signal of recognition of the possible inflationary pressures which are present in the economy and which will affect the price development in the medium term."

You have mentioned [the increase of] food prices, is it a long term trend or is it just a one-time hike?

"We believe that the trend which I have mentioned will not continue in the medium term. In the medium term we expect some slowdown in inflation in this segment. The prices of foodstuffs are very volatile and this means the forecast is accompanied by a lot of uncertainty."

You also issued a prediction for the year 2002. How will the trend continue?

"Our assumption is that the short-term inflationary pressures which will affect price developments roughly in a one-year horizon will then gradually slow down and inflation will decline slightly. But this decline is accompanied by some uncertainty and there are several risks which might lead to some persistency of inflation on the higher level predicted in the short-term."