Czech producer price drop highlights deflation risks

Czech producer prices fell more than expected in December, highlighting deflation risks to the economy that have fuelled speculation the central bank may need to loosen monetary policy by weakening the crown again. The producer price index (PPI) dropped by 1.3 percent month-on-month, bringing the annual rate to minus 3.7 percent, the Czech statistics office said.
Analysts polled by Reuters had expected industrial PPI to fall by 0.7 percent month-on-month in December and 3.0 percent year-on-year. Pavel Sobisek, UniCredit's chief economist in Prague, said the fall in prices was driven by oil and food prices. Those are the two factors that central bank Governor Miroslav Singer referred to this week when he quashed some expectations of imminent policy easing by saying there was no reason to react quickly to their price development.
"It would not be appropriate to react with a monetary policy tool in the short horizon, it is more a question of whether this will have a positive or negative impact. I think the former," Sobisek said. Singer said this week cheaper oil and food had started to feed into price indices faster than the bank had expected, but that a large part of their impact was likely to fade over the central bank's 12-18 month timeframe for deciding policy.
He also said lower oil prices, which free up cash for households to spend elsewhere, were good news for the economy. The central bank said in November 2013 it would intervene in currency markets to weaken the crown if it firmed above 27 per euro and so spur growth and fight deflation, and has since pledged to continue that policy into 2016.
On Monday, speculation the central bank might move the currency's floor to a weaker level in February pushed the crown to a six-year low of 28.520 to the euro. It bounced on Thursday, however, after the Swiss National Bank scrapped its cap on the franc reaching a session high of 27.750, and showed only a mild reaction to Friday's producer price data. The currency had firmed by 0.4 percent to 27.850 per euro by 0859 GMT, compared to 27.900 before the release. While Singer's comments and the Swiss decision have lifted the crown, some analysts still think the bank will need adjust policy to counter the oil price slump and deflationary pressure coming from the euro zone.