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Czech Watch – 17 July 2001

17.7.2001 10:55

- Industrial producer prices grew +0.2 % month-on-month in June (the same growth rate was reported in May), while the year-on-year growth was +3.4 % (after +3.8 % in May). Prices in manufacturing rose also +0.2 % month-on-month but farmers' prices jumped +7.5 % in June. Prices of construction works were 0.4 % higher in June than in May and prices of business services were up by a mere 0.1 %. In manufacturing, the biggest price increase was recorded in the area of coke, refined petroleum products (+0.9 %), followed by a +0.6 % at basic metals and fabricated metal products (affected by prices on world markets). On the opposite side, the largest price drop was recorded in pulp, paper and paper products (-0.8 %) and at chemicals, chemical products and man-made fibres (-0.6 %). Year-on-year, prices in manufacturing increased 2.8 %, construction works prices rose 4.2 %, farmers' prices jumped 16.5 %, and prices of business services added 6.0 %.

- CNB Bank Board member Michaela Erbenova argued that the recent higher-than-expected growth in consumer prices is due to temporary factors like oil and food prices and has not required a change in monetary policy so far. But she then added, "the situation can quickly change”. Latest developments in the labor market and a further acceleration of economic growth boosted by public sector demand could lead to a change in monetary policy. In a recently written report, the OECD states that in the light of the economic recovery, expansive fiscal policy and recent higher-than-expected inflation, the CNB may in the future face problems with hitting its inflation targets. While the current strengthening of the crown helps reduce inflationary pressure, a subsequent weakening may lead to overshooting of the CNB's medium-term inflation target. Erbenova said the report's conclusions concerning monetary policy were in line with CNB analyses.

- The same OECD survey predicts that the Czech GDP will grow 3.0-3.5 % in 2001 and 2002, while inflation should stay below 5 %. Domestic demand should be growing fast but overall economic growth will be limited by the restructuring of the business sector. Foreign trade is predicted to have a negative impact on GDP growth, as imports will grow fast due to a dynamic increase of exports and a stronger domestic demand. The C/A deficit will exceed 5.5 % of GDP in both 2001 and 2002. The survey urges continuing the pension reform, amending the Bankruptcy Act and resolving the issue of heavily indebted businesses. OECD also criticizes slow deregulation in the energy and telecoms sectors and warns that the growing public finance deficit along with the current account deficit could jeopardize economic stability in the country.

- Deputy Finance Minister Eduard Janota said that 2001 central state budget deficit is likely to amount to CZK 40bn, instead of the approved CZK 49bn. The revenues will grow by the extraordinary proceeds from tax on the profit made by Ceske radiokomunikace and higher than planned social insurance payments. Expenditures should be lower because of a lower than expected loss of Konsolidacni banka. As a result, the government will be able to cover the sum by which last year's deficit was exceeded. On Friday, the Chamber of Deputies refused to pass the final state account for 2000 for this reason, and asked the government to suggest how the excessive deficit will be covered.

- Foreign Minister Jan Kavan refused to comment on the reported decision by the German government to officially call on the Czech Republic to shut down the Temelin nuclear power plant. He said he has had the text of the document available since Friday, but he had received it through unofficial channels. "I, therefore, cannot react, it would be extremely unfair," Kavan explained.

- Late on Monday the Czech crown was almost flat against late Friday’s levels at 33.82/85 CZK/EUR. The crown/dollar was trading at 39.56/58 late on Monday, slightly up from 39.63/65 late Friday.

- The OECD report meant another severe hit for the government bonds. The longest state 6.95/16 bond fell 55bps to 97.50/80, yielding 7.23/19 %. The state 6.75/05 fell 35bps to 100.55/85, yielding 6.56/46 %. The CEZ 8.75/04 bond fell 165bps (!) to 103.10/40 with yield rising from 6.87/75 % to 7.50/39 %, due to a rumored call by the German government to shut the Temelin nuclear plant.

late July 15 bond yield late July 14
State 6.75/05103.75/055.65/57103.65/95
State 6.95/16105.90/206.32/39105.60/90

(Martin Kupka)

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