UPDATE 1-IMF raises outlook for Czech economy, backs growth-friendly plans

Mon Jun 30, 2014 10:42am EDT

Related Topics

* IMF forecasts growth of 2.5 pct in 2014 and 2015

* Says fiscal policy support would help

* Recommends loose monetary policy until inflation at target (Adds quotes, details)

PRAGUE, June 30 (Reuters) - The International Monetary Fund raised its growth outlook for the Czech Republic on Monday, tacitly agreeing with a new Czech government's plans to increase spending and abandon earlier efforts to reduce the budget deficit.

The Czech economy, recovering from a record 18-month recession that ended a year ago, will grow by 2.5 percent in 2014, the IMF said, faster than the forecast of 1.9 percent in its April report. That is in line with the Czech central bank's outlook.

The IMF also said in a report concluding a regular mission that the economy should grow by the same rate in 2015. The export-oriented economy is benefitting from increased trade with the euro zone and improved domestic demand.

"What we are seeing, so far, is the recovery picking up. We can see what we call a broad-based recovery," mission head Costas Christou said at a news conference.

"The recovery is in the works, but it is still a nascent recovery, so in that sense some support from fiscal policy would be appropriate, as long as it is underpinned by increased capital spending."

A centre-left government took power earlier this year and has pledged to keep the overall fiscal deficit below the EU's ceiling of 3 percent of gross domestic product, abandoning plans by earlier administrations to cut the budget gap.

It is looking to spend more on infrastructure projects and slowly undo many of the savings measures taken under a previous centre-right cabinet - for example, passing plans to raise pensions and state workers' wages next year.

The IMF also said it recommended the central bank maintain supportive monetary conditions until inflation expectations are well-anchored around the bank's target of 2 percent.

With interest rates near zero since the end of 2012, the central bank intervened last November to weaken the crown by more than 6 percent to fight deflation risks and aid the recovery.

"The policy of the central bank was very helpful, trying to guide inflation and inflation expectations," Christou said.

The country has avoided falling prices but inflation has remained close to zero in recent months. The IMF projected the annual rate would "approach" the target next year.

The bank said last week its policy of being ready to intervene to keep the crown weak would not end before the second quarter of 2015.

(Reporting by Robert Muller, writing by Jason Hovet, editing by Larry King)

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