VZCZCXRO6583
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHPG #0326 1510734
ZNR UUUUU ZZH
R 300734Z MAY 08
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC 0347
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS PRAGUE 000326 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EAGR EZ
SUBJECT: CZECH NATIONAL BANK PREDICTS SHALLOWER SLOWDOWN 
AND FASTER INFLATION CORRECTION 
 
REF: A. PRAGUE 258 
     ¶B. 07 PRAGUE 1201 
     ¶C. 07 PRAGUE 758 
 
¶1. SUMMARY: The Czech National Bank has revised its 2008 GDP 
growth forecast upward from 4.1% to 4.7% and confirmed its 
expectation that inflation will return to below 3% by 2009. 
At the same time, the CNB revised its 2009 GDP forecast 
downward from 4.6% to 4% based on lower export and investment 
projections.  External assumptions behind CNB's forecast for 
the remainder of 2008 and 2009 include a slowdown in Eurozone 
growth, a spike in Eurozone inflation followed by a period of 
rapid decline, a gradual fall in Eurozone interest rates 
through 2008, higher oil prices, and continued appreciation 
of the Czech crown against the Euro.  Market analysts agree 
that the Czech economy will continue on its path of strong 
growth with a shallower slowdown than previously expected, 
but there is healthy skepticism about the CNB's inflation 
prognosis.  END SUMMARY. 
 
¶2. Econoff attended the Czech National Bank's (CNB) quarterly 
meeting with analysts on May 16.  The session focused on the 
inflation outlook, given last quarter's (Q1/2008) record 
inflation that caught both the CNB and the market by 
surprise.  January 2008 inflation data from the Czech 
Statistical Office revealed that CPI inflation hit 7.5% 
year-on-year -- the highest inflation rate since November 
1998 and the fifth highest among EU member states.  This 
figure was more than a full percentage point above market 
expectations and .8 pp above CNB forecast.  The CNB 
reiterated that the inflation spike was "a temporary swing 
sparked by tax changes, increase in regulated prices 
(electricity, gas, housing services), and extraordinary high 
growth to food prices," and predicts inflation will ease back 
to 5.3% in Q4 2008 and 2.4% in Q2 2009.  Having said that, 
the CNB acknowledged a pro-inflationary risk to its 
prognosis, noting that April 2008 headline inflation of 6.8% 
(released only days before the meeting so not included in the 
CNB' forecast model) is slightly above its new forecast. 
 
¶3. In April, the Czech Ministry of Finance (MinFin) also 
released its revised macroeconomic forecast for 2008 and 
¶2009.  Following a record growth of 6.6% in 2007, MinFin 
predicts GDP growth will slow to 4.9% in 2008 based on weaker 
foreign demand and somewhat weaker domestic consumption, then 
rise slightly to 5.1% in 2009.  The most recent IMF forecast 
predicts 4.2% GDP growth for the Czech Republic in 2008, 
while CPI inflation is expected to decrease to 3.9% in 2008 
and 2.9% in 2009.  IMF projects unemployment levels to fall 
from 6.6% in 2007 to 5.2% in 2008 and to 4.3% in 2009. 
 
¶4. The CNB's optimism for accelerated decrease in inflation 
is based on a combination of restrictive fiscal policy, weak 
foreign demand, and continued strength of the Czech currency 
against the Euro and the Dollar.  On fiscal policy, despite 
fears that the Czech Republic would significantly overshoot 
its 3%/GDP budget deficit Maastricht criteria in 2007, 
revised data revealed a deficit of only 1.6%/GDP due to 
higher than expected GDP growth of 6.6%.  Deficit forecast 
for 2008 is 1%/GDP compared to the 3%/GDP parameter approved 
in the 2008 budget bill, again due robust growth.  2009 
budget forecast is slightly expansionary with fiscal deficit 
expected at 1.4%/GDP.  One reason for skepticism about CNB's 
optimism for fast inflation correction is that while the CNB 
forecast assumes continued strengthening of the Czech crown, 
some market analysts predict the Czech crown will see an 
exchange rate correction by the end of 2008. 
Graber