PRAGUE--The European Central Bank's efforts to prevent eurozone deflation from taking root present the main risk to the Czech economy, and may force the Czech central bank to weaken the koruna further to enable a return to domestic headline inflation, the Czech central bank said Friday.
"Actions taken by the ECB to counter the deflationary tendencies in the euro area...represented probably the greatest uncertainty... [This] might give rise to a need to move the level of the exchange rate commitment," the central bank said in minutes to its Feb. 5 monetary policy meeting.
The Czech central bank said it would intervene to weaken the koruna if the continued importation of deflationary pressures from neighboring countries leads to a sustained downturn in domestic demand, deflationary pressures and a substantial decrease in inflation expectations.
The inflationary impact of the Czechs' weak-koruna regime, which began in November 2013, has been fading, but it still helping economic growth and a recovery in the labor market, though the central bank said its own forecasts for wage growth were over-optimistic.
It said recent low global oil prices and their impact on demand and inflation hadn't yet been fully factored into its economic forecasts.
The low oil prices would help economic growth, but the central bank also said it would consider a monetary policy response to oil prices if they were to lead to increased deflationary pressures.
The central bank recently extended the weak-koruna regime until at least the second half of 2016. It said this creates conditions for inflation to accelerate. The central bank said core inflation was in positive territory.
Write to Sean Carney at sean.carney@wsj.com
(END) Dow Jones Newswires
February 13, 2015 03:08 ET (08:08 GMT)
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