In August the Czech consumer prices decreased by 0.1%. The year-on-year inflation decelerated to 6.5% from previous 6.9%. The inflation is just 10bp lower then estimates and the structure of changes is not much surprising. The price declined mainly due to declining oil and food prices.

 

Cancelling of the 50 heller coins (1/2 of CZK) could provide some upside impulse for inflation in September. Nevertheless the trend of declining inflation should continue. By the end of this year the yoy inflation should drop below 5% and at the beginning of 2009 below 4%.

 

The deceleration of inflation and fears from significant deceleration of the Czech economy could bring about another 25bp rate cut by the Czech National Bank to 3.25% in Q4 2008. However it is important to mention that further weakening of the CZK would reduce such a need.

 

We stick to our recommendation to buy Czech government bonds with maturities from 4 – 15 years.