CEE currencies extended post EU summit gains by the end of the week. Nevertheless the relief is still rather limited as some kind of uncertainty around euro-rescue plan still persists. The EUR/CZK pair failed to break below 24.66 and EUR/PLN below 4.30, so technically speaking both currencies remains rather on the defensive side.
The Czech Ministry of Finance announced that the growth should decelerate next year to 1% growth. This is broadly in line with our view (1.1%). Initially the budget for 2012 was prepared with assumption of 2.5% growth. Hence the ministry of finance should find additional savings around CZK17-18bn (0.5% GDP), if it wants to stick to its target deficit of 105 billion koruna. New growth outlook is hardly surprising for the market, but what is new is the willingness of the government to strictly stick to the budget deficit targets. Theoretically one could argue that weaker growth worsens cyclical deficit and not the structural one that the government should target. Fighting the cyclical deficit can be both costly and ineffective as it distorts attention from much more needed structural reforms (pensions, health care) and it can further worsen current gloomy growth outlook. Dep. Finance Minister Jan Gregor said that consideration is being given to increasing the single VAT rate above the planned level of 17.5%, but he said he does not know whether an effort will be made to speed up the unification of rates. That would have quite a dramatic impact on inflation outlook.