Inflation drops well below target band
Overview:
Inflation has dropped sharply in recent months (and is negative according to Eurostat) as economic output has contracted. However, there are few risks of sustained deflation given clear signs of an economic recovery as EU demand for Czech exports recovers. The fall in industrial output has stabilised and GDP has recorded two quarters of positive q-o-q, seasonally adjusted growth. The balance of payments picture is strong, allowing (along with improved investor risk appetite) the koruna to regain lost ground against the Euro. The fiscal position has deteriorated rapidly as the authorities have sought to soften the economic downturn. This is not of immediate concern, however, given low public debt and little urgency to enter the Euro. However, the political agreement to limit the fiscal deficit in 2010 is important.