Deflation Likely In Short Term

The Czech Republic is likely to undergo a period of deflation in H209, as ongoing aggregate demand destruction weighs on upside price pressure. While we forecast a return to positive CPI growth of 1.0% y-o-y by end-2009 and 2.3% by end-2010, we caution that the short-term inflation outlook elevates risks of a further cut to the Czech National Bank's two-week repo rate (currently set at 1.25%).

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