Bloomberg News

Czech Policy Makers Mull Rate Cut as Euro Woes Hurt Outlook

November 04, 2011

(Updates with vote result in second paragraph, governor’s comments beginning in third.)

Nov. 3 (Bloomberg) -- The Czech central bank debated whether to cut interest rates and signaled it may ease borrowing costs before the end of the year as the euro area’s debt crisis worsens the economic outlook.

The Ceska Narodni Banka left the benchmark two-week repurchase rate today at a record-low 0.75 percent, below the European Central Bank’s main rate, which was lowered by 25 basis points to 1.25 percent. One Czech policy maker sought a quarter- point rate reduction today, with the remaining six board members voting for no change. The decision was in line with the expectations of all 20 analysts in a Bloomberg survey.

An economic slowdown in the euro area, the main market for Czech exports, will hamper growth this year and next, central bank Governor Miroslav Singer told reporters in Prague. The central bank cut the 2012 gross domestic product forecast to 1.2 percent, from 2.2 percent, and said its base-line scenario saw a decline in market interest rates in the fourth quarter.

“The forecast is consistent with a slight decline in market rates at the beginning of the forecast, and their stability until the turn of the years 2012 and 2013,” Singer said. “Our goal is price stability, and I can imagine a move in any direction, if required, to ensure the goal is maintained.”

Balancing Concerns

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 a ninth month on Oct. 25. Romania bucked the trend yesterday, cutting the EU’s highest rate by a quarter- point to 6 percent.

The ask price for Czech forward-rate agreements locking in the three-month interest rate in six months was 1.09 percent today, down from 1.36 percent when the central bank published its latest forecast on Aug. 4. The three-month Prague Interbank Offered Rate was 1.15 percent. The koruna gained 0.6 percent to trade at 25.022 to the euro as of 3:09 p.m. in Prague.

The previous forecast from Aug. 4 saw borrowing costs rising from about the end of the year. The new outlook sees the headline inflation rate rising to 2.8 percent in the fourth quarter of next year, mainly because of an expected increase in the lower bracket for the value-added tax. Monetary-policy inflation will move “slightly under the inflation target” of 2 percent through the first quarter of 2013, Singer said.

Weak Demand

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, 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.

September inflation was 1.8 percent, below the central bank’s 2 percent target for a fourth month and 0.4 percentage point below the bank’s forecast, 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.

Weakening Koruna

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.

A weakening of the Czech koruna is easing conditions for Czech exporters as it makes their goods cheaper abroad. The currency has lost 3.5 percent to the euro in the past three months, according to data compiled by Bloomberg, and is down 0.4 percent since the start of the year.

The central bank’s base scenario sees the koruna gaining early next year and it sees the average exchange rate at 23.1 to the euro in 2012. The bank also prepared an alternative scenario which sees a “sharp slowdown” in the euro area’s economic growth next year. Under this outlook, the koruna would average 24.2 per euro and market interest rates would be higher than in the base scenario.

--With assistance from Zoya Shilova in Moscow. Editors: Alan Crosby, Andrew Langley

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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