Bloomberg News

Czech Central Bank to Keep Record-Low Rate on Demand, Greece

June 23, 2011

(Updates market rates in seventh, 15th paragraphs.)

June 23 (Bloomberg) -- The Czech central bank will probably leave interest rates at a record low for a 13th month as government spending cuts damp domestic demand and the euro area’s debt crisis threatens an economic recovery.

The Ceska Narodni Banka will leave the benchmark two-week repurchase rate at 0.75 percent, a half-point less than the European Central Bank’s main rate, at a meeting today, according to all 23 analysts in a Bloomberg survey. The bank will announce its decision at 1 p.m. in Prague and will hold a news conference at 2.30 p.m.

The Czech monetary authority has kept the main rate steady since May 2010 as central banks across Europe lifted borrowing costs to curb inflation. Poland increased its benchmark rate for a third month and the fourth time this year on June 8. Czech policy makers will weigh differing signals from the economy as overall output growth and headline inflation accelerated, while government spending cuts continue to hinder domestic demand.

“At first, the data that came out in the last six weeks indeed appeared pro-inflationary,’ Erste Group Bank AG said in a June 21 report. “Looking under the surface, though, we can see a somewhat different picture.”

Inflation accelerated to 2 percent in May, matching the central bank’s target, from 1.6 percent the previous month, driven mainly by higher food prices, the statistics office said on June 9. Housing and energy costs, as well as more expensive oil, also helped spur inflation above the central bank’s 1.7 percent forecast for May.

Government Austerity

Gross domestic product grew 2.8 percent in the first quarter on the year, compared with 2.7 percent in the final three months of 2010, with exports and a revival in investments contributing the most to the expansion. Household and government consumption declined as the Cabinet of Prime Minister Petr Necas trims state spending.

The Czech koruna was little changed at 24.317 to the euro as of 8:47 a.m. in Prague. The koruna has gained 2.9 percent to the euro since the start of the year, the second-best performance among 25 emerging-market currencies tracked by Bloomberg, after Hungarian forint.

Czech policy makers have shown differing views on inflation risks, with some central bank board members advocating higher borrowing costs. Eva Zamrazilova and Kamil Janacek voted for higher borrowing costs at last meeting on May 5, while the remaining 5 policy makers voted for stable rates.

May inflation data were “in line with the overall spirit” of the current central bank forecast, which says the domestic economy isn’t generating demand pressures on consumer prices and that inflation is driven mainly by commodity costs, the bank said on June 9.

Export-Driven

The Czech economy is driven by foreign demand for its goods, including Skoda Auto AS cars, as exports account for about 70 percent of GDP. Companies also supply parts to German manufacturers, which then sell their products outside the European Union.

The economic recovery is facing risks of a potential negative impact of the-area’s sovereign debt crisis as Greece seeks to push through 78 billion-euro ($112 billion) of budget cuts to secure more international financial aid.

The International Monetary Fund, contributor of a third of bailout money for Greece and the two other euro-area countries that have received bailouts, Ireland and Portugal, has warned EU leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.”

The Czech central bank forecasts GDP growth of 1.5 percent in 2011. It sees the inflation rate at 2.2 percent in the second quarter of next year and at 2.1 percent in the third quarter, which is the boundary of what it calls the monetary-policy horizon.

Accelerated Timetable

Policy makers moved forward the timing of a rate increase to the fourth quarter from the first quarter in 2012, reflecting expectations of more monetary tightening in the euro area, the central bank said on May 5.

Forward-rate agreements locking in three-month interest rates in three months rose to 1.43 percent from 1.34 percent at the start of the month. The three-month Prague Interbank Offered Rate, or PRIBOR, was at 1.20 percent, indicating investors expect borrowing costs to rise at the end of the third quarter.

The Czech inflation rate may continue rising in the coming months, although risks are “rather squeezed to the downside than to the upside,” Danske Bank AS said in a report.

“In our view, the Czech central bank is well aware of the increasing downside risk to the Czech economy from global manufacturing slowdown, but also from the European debt crisis,” Danske said. “Therefore, the first rate hike still looks most likely in the fourth quarter this year at the earliest.”

--With assistance from Zoya Shilova in Moscow. Editors: Alan Crosby, Balazs Penz

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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