FACTBOX-Key assumptions of Czech c.bank CPI forecasts

...

Following are selected forecast assumptions, and how they changed versus previous reports:

INTEREST RATE TRAJECTORY BUILT INTO ECONOMIC PREDICTION:

July 2007: "Consistent with the macroeconomic forecast and its assumptions is growth in nominal interest rates."

April 2007 - "A gradual rise in nominal interest rates over the entire forecast horizon."

January 2007 - "Broad interest rate stability initially and then a gradual rise in nominal interest rates at the forecast horizon."

HEADLINE ECONOMIC FORECASTS: HEADLINE INFLATION JUNE 2008 DECEMBER 2008

CPI (pct chng y/y) 3.5-4.9 3.5-4.9 MONETARY POLICY INFLATION

CPI net of primary

effects of tax changes

(pct chng y/y) 2.6-4.0 3.0-4.4

GDP 2007 2008

Real GDP (pct chng y/y) 5.5-6.7 (4.9-6.5) 4.1-6.7 (3.8-6.8)

NOTE. Forecasts from April in brackets. The CNB looks 12-18 months ahead when setting interest rates, as it believes this is how long it takes for policy decisions to filter through fully to the economy.

ESTIMATE OF INFLATION NON-ACCELERATING GROWTH IN OUTPUT:

July 2007: 5.8 percent at present; declining gradually to 5.5 percent at the forecast horizon.

April 2007: around 5.5 percent at present, but converging to the 5 percent level in the long-run.

January 2007: slightly above 5 percent at present; long-term estimate at 5 percent.

NOTE. The maximum speed that the CNB thinks the economy is capable of achieving without stoking demand pressure on prices.

ASSUMED 1-YEAR REAL EQUILIBRIUM MONEY MARKET INTEREST RATE:

July 2007: just above 1 percent.

April 2007: just under 1 percent.

January 2007: slightly below 1 percent; slowly declining on the forecast horizon.

ASSUMED ANNUAL EQUILIBRIUM REAL EXCHANGE RATE APPRECIATION:

July 2007: 3.0-3.5 percent, with a gradually declining tendency.

April 2007: 3.0-3.5 percent, with a gradually declining tendency.

January 2007: 3.5-4.0 percent, with a gradually declining tendency.

ASSUMPTIONS ABOUT NOMINAL EXCHANGE RATE OF THE CROWN:

July 2007: "In the remainder of 2007, the exchange rate of the koruna against the euro will be close to its current levels. The depreciation pressures stemming from the negative interest rate differential vis-a`-vis other currencies and from the higher domestic inflation than in other countries will be balanced by long-term equilibrium appreciation of the real exchange rate. This long-term effect will start prevailing in the course of 2008 and a trend of moderate nominal appreciation of the exchange rate will be renewed."

April 2007: "In the remainder of 2007, the exchange rate of the crown against the euro will be close to its current levels ... in the course of 2008 ... a trend of moderate nominal appreciation of the exchange rate will be renewed."

January 2007: "Over the entire forecast period, the exchange rate of the crown against the euro will be close to its current levels."

PUBLIC FINANCE DEFICIT (under EU's ESA 95 standards):

as pct of GDP 2007 2008

July 2007 forecast 3.5 3.0

April 2007 forecast 3.5 3.4

January 2007 forecast 4.0 3.9

(Compiled by Marek Petrus in Prague)

Keywords: CZECH CENTRALBANK/REPORT

[Reuters/Finance.cz]