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Czech central bank sees inflationary risks on downside

December 20, 2012 Central Bank News
The Czech central bank, which earlier today left its rock-bottom interest rates unchanged, said the overall risks to inflation were slightly on the downside and monetary-policy relevant inflation will be in the lower half of the bank's tolerance band over the whole forecast horizon.
The published presentation to a press conference by the Czech National Bank (CNB) showed that the decision to keep the two week repo rate steady at 0.05 percent was unanimous and headline inflation was expected to remain slightly above the CNB's inflation target next year due to tax changes.
The central bank targets inflation of 2 percent and strives to ensure it doesn't vary by more than one percentage point in either direction. The presentation showed that inflation was forecast to decline further from November's 2.7 percent and then remain above 2 percent most of 2013 before falling below 2.0 percent in the first quarter of 2014.
The Czech economy shrank further in the third quarter, with net exports the only positive contributor, the bank's presentation showed, and "developments in industrial production, construction output and retail sales in October continue to indicate subdued economic activity."
The Czech Gross Domestic Product shrank by 0.3 percent in the third quarter from the second for an annual shrinkage of 1.3 percent. The CNB had forecast annual contraction of 0.8 percent.
"The labour market exhibits sign of slump," the bank said, adding annual growth in average nominal wage gain again decelerated markedly in the third quarter. Average wages rose by an annual 1.4 percent in the third quarter, below the bank's forecast of 2.4 percent.
The downside risks to the CNB's inflation forecast comprise weaker domestic activity and slower wage growth; domestic price developments and developments abroad. The upside risk is higher commodity prices.
"The koruna exchange rate partially offsets anti-inflationary domestic developments," the bank's presentation said.
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