*Annually weaker crown stirs price pressures
*But weak demand puts cap on price growth
*For INSTANT VIEW double click on []
By Jana Mlcochova
PRAGUE, July 9 (Reuters) - Czech consumer prices were flat
for the second month in a row in June but year-on-year inflation
remained a tad above the central bank's forecast, suggesting
interest rates will stay flat in the months to come.
The annual inflation rate in June was 1.2 percent, in line
with expectations, and at the lowest since December 2003.
The central bank had expected inflation at 1.0 percent. It
targets the consumer price index at 3 percent with a tolerance
band of one percentage point around that target and will switch
to 2 percent as of 2010, in line with the euro zone.
"The difference between real inflation and the expectation
of the central bank is widening... and however low inflation may
be, the inflation trajectory will start rising at the end of the
year as food and oil prices stop having an anti-inflationary
effect," said Radomir Jac, a chief economist at Generali PPF
Asset Management.
"This number does not change my opinion that the central bank
will leave rates unchanged."
The bank has cut interest rates by 2.25 percentage points
since August to a record low of 1.5 percent after a global
economic downturn put a strain on Czech exports. The euro zone
benchmark rate is also at a record low of 1.0 percent.
The small and open economy, whose rapid expansion in past
years was mainly thanks to exports to the West, shrank by a
record 3.4 percent in the first quarter of the year.
Central bank Governor Zdenek Tuma said after the June
rate-setting meeting the economy was likely past the worst.
[] The central bank forecasts a 2.9 percent
contraction this year and growth of 1.4 percent next year.
But weak May industrial output and foreign trade data raised
concerns the contraction could be even deeper in the second
quarter. [] []
THE CROWN EFFECT
The Czech crown <EURCZK=> was hit by the global flight from
riskier emerging markets assets but remains central Europe's
best performer having gained around 3.3 percent so far this
year. The zloty and the forint have both weakened since January.
Despite the general risk aversion, investors see the Czech
currency as a safer haven compared to peers.
Year-on-year, the unit is 11.5 percent weaker than a record
high of 22.925 seen in July last year but it is 14 percent
stronger than its weakest levels so far this year.
Governor Zdenek Tuma has said the year-on-year weakness of
the unit is helping the economy weather the impact from the
economic crisis. []
But some economists have warned the current levels of the
crown put further strain on exporters already hammered by the
weak demand from the recession-hit euro zone.
"We should be able to avoid deflation thanks to the weaker
crown (year on year) which will lead to acceleration of consumer
price growth in the rest of the year," said Jiri Skop, an
economist at Komercni Banka.
"The price growth, however, will be tamed by the relatively
weak demand pressures and the secondary impacts from low
commodity prices," he said adding he maintained his view for
stable rates till the end of the year.
He said a further rate reduction cannot be excluded should
the external economic situation worsen or should the crown
appreciate.
A separate set of data from the Labour Ministry showed June
unemployment rate rose to a slightly lower-than-expected 8.0
percent from 7.9 percent in May, the highest since April 2006.
