Boston, MA -- (SBWIRE) -- 05/24/2013 -- Core Views

We forecast the Czech policy rate to remain at 0.05% throughout 2013 given the lack of domestic inflationary pressures. Headline consumer price inflation will fall within the central bank's target range of 2.0% += 1.0% in 2013, allowing the Czech National Bank to loosen policy further via extraordinary measures, most likely by weakening the koruna against major trading peers.

We believe the Czech Republic's is on a sustainable fiscal trajectory in spite of forecasting government deficit targets to be missed in the coming years given low deficits and public debt. The 2013 draft budget eases fiscal austerity starting in 2014 as we had expected, which should help the gradual economic recovery via less pressure on household spending.

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While the Czech centre-right coalition government has managed to survive yet another vote of no confidence, held on November 7, we continue to doubt the coalition will hold together through to parliamentary elections in 2014. That said, we highlight potential factors that could work to mitigate these risks and allow the government to maintain its tenuous hold on power.

Major Forecast Changes

We have revised up our current account deficit forecast to 2.3% of GDP in 2013 and 2.2% of GDP in 2014. A recovery in goods exports in H213 and persistently weak domestic demand should prove supportive to the trade surplus, while improving corporate profitability will increase capital repatriation, driving a widening of the income account deficit.

Risks To Outlook

A more pronounced slowdown in eurozone economic growth and in particular in Germany would have a negative effect on the Czech Republic's economic growth trajectory. Owing to the high degree of trade integration with Germany, the Czech Republic's economic recovery remains highly dependent on external demand remaining relatively receptive to Czech exports.

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