Bloomberg News

Czechs Don’t Need Higher Rates in Near Term, Central Banker Says

January 26, 2012

Jan. 20 (Bloomberg) -- The Czech central bank shouldn’t cut interest rates further and doesn’t need to tighten policy in the “near-term” given the lack of domestic inflationary pressures in the economy, board member Pavel Rezabek said.

The Prague-based Ceska Narodni Banka has kept the benchmark rate at a record-low 0.75 percent, a quarter-point below the European Central Bank’s main rate, since May 2010 as policy makers weighed a slowing economy against accelerating inflation at the last meeting on Dec. 21. The Czech economic outlook is clouded by the debt crisis in the euro area, which takes about 70 percent of the country’s exports.

The economy is deviating from the bank’s baseline forecast from Nov.3 that had assumed a decline in interest rates and is converging with the alternative outlook which saw stable rates, Rezabek said in an interview in Prague yesterday. Rezabek, who has voted with the board’s majority to keep the rates stable since the last change, said he isn’t in favor of a further loosening of monetary conditions.

“Tightening monetary conditions doesn’t seem warranted in the near term either given the fact that demand pressures are curtailed by the economic situation abroad,” Rezabek said. “I’m not concerned that more significant pressures would arise and spark an increase in interest rates in the near-term.”

Policy makers across east Europe face resurgent price growth due to weakening currencies and the worsening economic outlook in the euro region, their biggest export market, which may be nearing a recession under the weight of its debt burden and government austerity plans.

Czech rates may stay stable through 2012 barring a “surprise” buildup of inflationary pressures in the domestic economy, central bank Governor Miroslav Singer said in an interview on Jan. 18.

Contracting Economy

The Czech economy shrank 0.1 percent in the third quarter from the previous three months, the first quarterly contraction since a 2009 recession. Gross domestic product growth slowed to 1.2 percent from a year ago in the July-September period, from 2 percent in the previous quarter.

Inflation was 2.4 percent in December, slowing from a 3- year high of 2.5 percent in the previous month while remaining above the central bank’s 2 percent target for a third month. Inflation may have been influenced by prices rising ahead of the increase in the lower value-added tax bracket at the start of 2012, with domestic demand-driven inflation pressures absent, according to minutes from the December policy meeting.

“Inflation expectations are well anchored in the Czech Republic, and even the VAT increase hasn’t changed that,” said Rezabek. “Given the fact that inflation expectations are well anchored, there is no reason to react with monetary policy.”

‘Sharp Slowdown’

The central bank’s baseline forecast sees the koruna at 23.1 to the euro, GDP rising 1.2 percent and the three-month Prague interbank offered rate averaging 0.9 percent. The bank also prepared an alternative scenario that sees a “sharp slowdown” in the euro area’s economic growth this year, which would result in a 0.4 percent Czech GDP contraction.

This outlook also sees a weaker koruna and the Pribor rate at 1.3 percent on average. The three-month Pribor was 1.17 percent today.

The koruna has lost 1.3 percent to the euro in the past three months, the second-worst performance, after Hungarian forint, among 25 emerging markets currencies tracked by Bloomberg. The koruna weakened 0.3 percent to 25.374 to the euro as of 10:58 a.m. in Prague.

“Factors mentioned in the alternative forecast scenario appear to be materializing, including assumptions of relatively weak demand in the Czech Republic and the impact of problems in some more developed countries in Europe,” said Rezabek. “There is also the assumption of lower growth compared with the baseline scenario.”

--Editors: Alan Crosby, Andrew Atkinson

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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