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CNB's view of economy unchanged by floods

The recent floods have not changed the Czech National Bank's view of the development of the Czech economy, CNB governor Zdenek Tuma told reporters after Thursday's CNB Board meeting. "Economic growth will this year slow down by just tenths of a percent against original forecasts," said Tuma adding that the CNB for the time being would not revise its forecast for this year's GDP growth predicted at 2.0-2.7%.

The impact of the floods on this year's GDP should not be too great because rather than destroying production capacities, the floods only reduced production and a revival should be seen soon. On the other hand, the repair of flood damage could next year boost domestic demand. The effect on inflation will also be negligible, said Tuma. The floods can bring about a growth in the prices in construction and farmers' prices but will not affect general inflation. The CNB Board decided to leave interest rates unchanged. It last cut them in late July by 0.75 percentage points to a record low 3%. Tuma said monetary policy has been eased since the last monetary session, through rate cuts and also thanks to the Czech crown's exchange rate currently standing between 30 and 31 crowns per euro. The July inflation was in line with the CNB's predictions.

Other indicators like money supply and unemployment suggest a slowdown of economic activity. The chief risks consist in lower-than-expected revival of global economy and higher-than-expected price of oil next year, said Tuma. It will be possible to fully evaluate the effect of the recent floods only in two months. Moreover, the CNB still does not know the reaction of the government which said it was considering cuts in spending and the increase in some taxes, like excise duty and income tax.

(NewsBase 02.ix.02)

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