Bloomberg News

Weaker Koruna Prevents Czech Rate Change, Bank Minutes Show

January 08, 2012

Jan. 6 (Bloomberg) -- The Czech koruna’s weakening has loosened monetary conditions and allowed the central bank to maintain stable interest rates in December, according to minutes from the Dec. 21 policy meeting published today.

The Prague-based Czech National Bank left interest rates unchanged at a record-low 0.75 percent, a quarter-point less than the European Central Bank’s main rate, for a 13th meeting last month after policy makers weighed a worsening economic outlook against accelerating inflation. The Czech economic outlook is clouded by the debt crisis in the euro area, which takes about 70 percent of the country’s exports.

Board members said there are increasing risks of slower economic growth and a weaker koruna exchange rate than assumed in the central bank’s base-line forecast. Risks are slightly pro-inflationary compared with the base-line forecast, while inflation expectations are “firmly anchored in the longer-term horizon,” according to the minutes.

“It was said several times that the Czech economy is slowing and that no domestic demand-driven inflation pressures were apparent,” the minutes said, without specifying views of individual policy makers.

The bank has said the koruna’s moves are important for future rate decisions as a firming currency tames inflationary pressures and tightens monetary conditions, while its weakening makes imports more expensive. The koruna has lost 3.9 percent to the euro in the past three months, the second-worst performance among 25 emerging-market currencies tracked by Bloomberg, after Hungarian forint.

Stronger Koruna

The central bank’s base forecast, published Nov. 3, sees the koruna gaining this year, with the average exchange rate at 23.1 to the euro. It assumed a decline in market interest rates by the end of last year.

The bank also prepared an alternative scenario that sees a “sharp slowdown” in the euro area’s economic growth next year. Under this outlook, the koruna would be weaker, averaging 24.2 per euro, and market interest rates would stay stable.

The inflation rate rose to a 35-month high of 2.5 percent in November, mainly on food costs. Inflation relevant for monetary policy, which is price growth stripped of the primary impact of increases in indirect taxes, was also 2.5 percent, more than the central bank’s target of 2 percent.

The economy shrank 0.1 percent in the third quarter from the previous three months, the first quarterly contraction since a 2009 recession.

-- Editor: James M. Gomez

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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