Boston, MA -- (SBWIRE) -- 07/30/2013 -- We forecast the Czech policy rate to remain at 0.05% throughout 2013 given the lack of domestic inflationary pressures. With headline consumer price inflation falling within the central bank's target range of 2.0% += 1.0% in 2013, we do not expect the Czech National Bank to loosen policy further via extraordinary measures, such as foreign exchange rate intervention.

The government will water down its fiscal targets in 2013 and 2014, which should help the gradual economic recovery via less pressure on household spending. Even with fiscal targets missed, the Czech Republic is on a sustainable fiscal trajectory in the coming years due to low deficits and public debt.

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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

Despite the Czech Republic's worse-than-expected economic results in Q113, the country is poised for a modest turnaround this year as leading indicators signal that the worst may be now over. Although we have slightly revised down our forecast for growth for 2013 and 2014 - from 0.5% previously to 0.2% this year, and from 1.9% to 1.3% for 2014, we maintain our expectation for a modest rebound of the Czech economy this year.

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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