Boston, MA -- (SBWIRE) -- 03/20/2013 -- 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 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.

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.

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Major Forecast Changes

We have revised down our forecasts for Czech growth in 2012 and 2013 to -1.2 % and 0. 5% from -0.7% and 0.8% previously. Leading indicators point to still-weak domestic demand which will weigh on economic growth through H113.

Persistently weak domestic demand and stronger-than-expected export growth has led us to revise our current account deficit forecasts for the Czech Republic to 2.0% of GDP in 2012 and 1. 7% in 2013 from 3.1% and 3.0% previously. We anticipate weak domestic demand combined with an only mild recovery in profit repatriation to continue narrowing the deficit in 2013.

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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