Bloomberg News

Czech Rates Left Unchanged as Recession Eclipses Inflation

March 29, 2012

Czech Central Bank Governor Miroslav Singer. Photographer: Vladimir Weiss/Bloomberg

Czech Central Bank Governor Miroslav Singer. Photographer: Vladimir Weiss/Bloomberg

The Czech central bank kept its main interest rate at a record low for a 15th meeting as risks of an extended economic recession overshadowed an inflation spike fueled by an increase in sales taxes.

Six out of seven board members voted to leave the benchmark two-week repurchase rate at 0.75 percent, a quarter-point less than the European Central Bank’s main rate, in line with the forecasts of all 22 analysts in a Bloomberg survey. One policy maker demanded a quarter-point increase in the rate, which hasn’t changed since May 2010.

The economy, exporting about 80 percent of its output, slid into a recession last year as government spending cuts outweighed demand abroad for Czech-made vehicles, car parts and electronics goods. Inflation (CZCPYOY) accelerated to the fastest pace in more than three years in February, driven by an increase in the value-added tax rate at the start of the year, Governor Miroslav Singer told reporters in Prague today.

“There is slowing foreign demand, expected fiscal consolidation here and elsewhere and stagnating economy,” Singer said, listing reasons taming inflationary pressures. The bank board’s consensus “is slightly moving away” from the assumption of a decline in interest rates in the second half of the year, which was included in the bank’s latest forecast, he said.

Gross domestic product fell 0.1 percent in the last quarter of 2011, the same as in the previous three months. GDP in Germany (GRGDPPGQ), Europe’s largest economy and the main market for Czech goods, declined 0.2 percent in the fourth quarter from the previous three months after growing 0.6 percent between July and September. The Czech Republic ships about 70 percent of its exports to the euro area’s 17 members.

Rising Currency

The Czech koruna has strengthened 3.4 percent to the euro since the start of the year, the seventh-biggest gain among 25 emerging-market currencies tracked by Bloomberg. It traded at 24.769 to the euro as of 3:10 p.m. in Prague, compared with the weakest level in 18 months of 26.063 to the euro on Nov. 25.

The inflation rate jumped to 3.7 percent in February, the highest since November 2008, exceeding the central bank’s 2 percent target for a fifth month. The bank forecasts the rate will stay above 3 percent this year and before falling to 1.5 percent in the first quarter of 2013.

Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, was 2.5 percent in February, according to central bank data. Monetary-policy inflation will “move near” the inflation target of 2 percent by the third quarter of next year, Singer said today.

“Negative demand inflation, a stagnating economy, uncertainty in the euro area and the koruna’s relatively quick rebound are, in short, the reasons why rates aren’t changing now,” Martin Lobotka, an analyst at Erste Group Bank AG’s Czech unit Ceska Sporitelna AS, said by phone.

Poland’s central bank left its benchmark interest rate unchanged at 4.5 percent for a ninth month on March 7, while Hungarian policy makers kept their main rate at the same level for a third month on March 27.

Investors have pared bets on a decline in interest rates, with the forward-rate agreements fixing the three-month interest rate in nine months at 1.2 percent today, up from 1.03 percent on Feb. 2, the day of the previous monetary-policy meeting.

Weak Demand

The central bank doesn’t need to raise interest rates even with accelerating inflation as government austerity measures and a lack of spending by households and companies keep demand-led inflation pressures under control, Vice-Governor Mojmir Hampl said in a March 19 interview.

The government raised the lower bracket for the value-added tax levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 2012 to boost budget revenue. Annual retail-sales growth slowed to 1.3 percent in January, from 7.3 percent a year earlier, as budget spending cuts curbed household income and unemployment rate rose to an 11-month high of 9.2 percent in February.

“The combination of the central bank’s approach until now, the higher inflation rate, prospects of weak domestic demand, more fiscal savings and the outlook for further gradual koruna appreciation is pointing to a longer period of stable interest rates,” Michal Brozka, the chief analyst at Raiffeisenbank AS in Prague said in a note to clients today.

The central bank cut its forecast for 2012 economic growth to zero from a previous estimate for a 1.2 percent expansion because of weaker demand for Czech products abroad and the impact of government’s budget spending cut.

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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