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Czech inflation just over forecast, rate rise possible

Analysis

Czech consumer prices rose a slightly more-than-expected 0.3% in February, keeping annual inflation at the nine-year high which it reached at the start of the year, the statistical bureau said on Monday.

Price growth was driven mainly by housing prices, including water and heating, and kept open the possibility that the central bank will raise interest rates once more in the next few months. A separate set of figures from the Labor Ministry showed unemployment fell to 5.9% in February from 6.1% in the previous month. In a Reuters poll of analysts the median forecast for February inflation was 0.2% but the mean average was 0.25%, little different from the outcome.

The year-on-year inflation rate of 7.5% was in line with expectations. The data lacked the kind of negative surprise which shocked the market in January but analysts said inflation may still prompt more monetary policy tightening. The central bank has raised the main repo rate by 200 basis points to 3.75% as the economy roared ahead in the past three years.

“Within the structure of inflation we can identify the first signs of cost-side items filtering through into other consumer prices,” said Jan Vejmelek, head of economic and strategy research at Komercni Banka. “On the basis of the data today we believe that we will see one more interest rate tightening.”

Central bank Vice-Governor Mojmir Hampl said, he saw somewhat more demand-side pressure in the economy than he did at the end of 2007. But risks to inflation were large in both directions and growing, making decision-making very difficult, he said in an interview in Monday’s edition of the daily E15. The central bank has insisted that inflation would fall back to its target of 3%, +/- 1 percentage point, within a year as one-off effects of tax and regulated price increases in January fade.

A major anti-inflationary factor has been the koruna currency, which has gained 11% year-on-year against the euro. It has cooled off from the record 24.83 seen on March 4. It briefly dipped to 25.125 after the inflation data from 25.095 before but firmed back to 25.07 by 0830 GMT. (Reuters)

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