Bloomberg News

Czech Rates Should Be Held Through March, Policy Maker Says

October 24, 2011

(Updates koruna in sixth paragraph. For more comments from the interview, please click HERE.)

Oct. 24 (Bloomberg) -- Czech interest rates should remain unchanged until the end of the first quarter to gauge the economic impact of the euro region’s sovereign-debt crisis, policy maker Kamil Janacek said.

The Ceska Narodni Banka bucked the trend of monetary tightening earlier this year as central banks across Europe increased credit costs to fend off inflation pressures. All seven board members voted to leave the benchmark two-week repurchase rate at 0.75 percent on Sept. 22, half of the European Central Bank’s main rate. It was the 11th consecutive meeting where the rate stayed at a record low.

An economic slowdown in the euro area, the main market for Czech exports, will probably keep the country’s growth below the central bank’s current forecasts this year and next, Janacek, said in an Oct. 21 interview in Prague. A potential deepening of the crisis may lead to a rate cut if it intensifies downside inflation risks, Governor Miroslav Singer said in September.

“With such strong uncertainties in the external environment as we’re seeing now, a wait-and-see policy approach is the most appropriate,” Janacek, 68, said. “I don’t see reasons for moving interest rates in any direction in the foreseeable future, meaning in the next two quarters.”

Polish, Hungarian Rates

Central banks in the European Union’s eastern members are weighing faltering growth prospects against weaker currencies after tightening policy earlier this year. Monetary authorities in Poland left the seven-day rate unchanged for a third meeting at 4.5 percent on Oct. 6, while Hungary kept its benchmark rate steady at 6 percent for an eighth month on Sept. 20.

The Czech koruna has gained 0.3 percent against the euro this year, the best performance among more than 20 emerging- market currencies tracked by Bloomberg. The currency weakened as much as 0.3 percent to trade little changed at 24.960 to the euro at 4:51 p.m. in Prague.

The ask price for forward-rate agreement locking in the three-month interest rate in six months was 1.13 percent today, after 1.11 percent yesterday and compared with the three-month Prague Interbank Offered Rate of 1.16 percent.

The latest Czech central bank forecast from Aug. 4 sees interest rates rising from about the end of the year, though “several board members” said they may move in any direction in the future because of the uncertainty stemming from the sovereign-debt crisis, according to minutes from the Sept. 22 meeting.

‘Short Lived’

“I don’t think the developments in the economy warrant a further reduction in interest rates,” said Janacek, who voted for higher rates at four meetings this year before September. “Lower rates might not have a major impact on commercial interest rates and the lending policies of banks, while the signaling effect of such a move might be relatively short- lived.”

The central bank has maintained record-low borrowing costs as the government’s budget cuts constrained domestic demand and tamed inflation. The bank, whose mandate is price stability, had cut the main rate by 3 percentage points during the global economic crisis that sparked the worst Czech recession since the end of communism in 1989.

Inflation, Growth

September inflation was 1.8 percent, below the central bank’s 2 percent target for a fourth month and 0.4 percentage points below the bank’s forecast for that month, mainly due to lower food prices.

A Czech economic recovery is dependent on EU demand for its products, which include Skoda Auto AS vehicles and car parts. The bloc purchases about 80 percent of Czech exports, with Germany alone accounting for a third.

Czech growth eased in the second quarter for the first time since a 2009 recession as a slowdown in the EU dented demand for exports and government austerity measures curbed domestic spending. Gross domestic product rose 2.2 percent in the second quarter from a year earlier, after expanding 2.8 percent in the first three months.

“It’s clear that any slowdown in economic dynamics in Europe, mainly in the euro zone, will negatively affect economic dynamics in the Czech Republic,” said Janacek, expecting net exports to remain the main driver of the economy this year and next. “My estimate is that this year’s growth will be slightly below 2 percent, and next year could be somewhere between 1.5 percent and 2 percent, depending on the pace of German growth.”

Real GDP may grow 2.1 percent in 2011 and 2.2 percent in 2012, according to the central bank’s outlook. The bank board will debate new forecasts at the next monetary meeting Nov. 3.

“Growth of around 3 percent may return in 2013 at the earliest,” Janacek said. “We can’t expect a return to growth levels of around 6 percent in the next three or five years.”

--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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