Bloomberg News

Czech Central Bank Holds Rates and Signals Drop on Economy

May 03, 2012

The Czech central bank left its main interest rate unchanged for a 16th meeting and signaled borrowing costs may decline further this year as the government’s austerity measures curtail economic growth.

Four policy makers at the Prague-based Ceska Narodni Banka voted to keep the two-week repurchase rate at a record-low 0.75 percent today, a quarter point below the European Central Bank’s main benchmark, Governor Miroslav Singer told reporters. Board members differed in assessing inflation risks as two voted for a cut to 0.5 percent, while one wanted an increase to 1 percent. All 20 economists in a Bloomberg survey forecast no change in rates, which have been steady since a cut in May 2010.

Czech borrowing costs have remained unchanged as the economy slid into a recession in the second half of 2011 and a tax increase at the start of this year spurred inflation to the fastest in more than three years. The bank’s new economic forecasts assume a decline in market interest rates this year, with a deeper drop if the government pushes through a second value-added tax increase in as many years, Singer said.

“The Czech economy will stagnate this year because of a significant slowdown in foreign demand and continued domestic fiscal consolidation,” Singer said. “Domestic factors, including weak domestic demand and slow wage growth, are currently taming price developments.”

Koruna Steady

Forward-rate agreements fixing the three-month interbank rates in six months fell 11 basis points, or 0.11 percentage points, to 1.12 percent after Singer comments, according to data compiled by Bloomberg. The three-month interbank offered rate, or Pribor, was 1.25 percent today. The koruna weakened 0.2 percent, reversing an earlier gain, to trade at 25.013 per euro as of 3:35 p.m. in Prague.

The bank left its economic-growth forecast unchanged from the previous outlook in February, when it saw a stagnant economy this year and a 1.9 percent expansion in 2013. It said the inflation rate in the second quarter of 2013 will be 1.5 percent, before falling to 1.4 percent in the next three-month period.

Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, was 2.7 percent in March, the central bank said. It forecasts monetary-policy inflation moving “slightly below” the 2 percent inflation target in 2013.

Tax Effect

A government plan to push through another VAT increase at the beginning of 2013, after raising the tax rate this year, would probably constrain household consumption and slow economic growth compared with the baseline forecast, the central bank said in its forecast.

“Interest rates would react, with lower reading from the end of 2013, to anti-inflationary pressure stemming from slower GDP growth,” it said.

Policy makers across Europe are weighing risks to economic growth, with the European Commission forecasting a contraction in the euro area this year, against inflation pressures amid the sovereign-debt crisis. Romania’s central bank has cut the benchmark rate four times since November to 5.25 percent while Poland left its main rate at 4.5 percent for a 10th month on April 4.

The Czech economy, which exports about 80 percent of its output, contracted in the third and fourth quarters of 2011 as government spending cuts outweighed demand abroad for Czech-made vehicles, car parts and electronics goods. The inflation rate rose to 3.8 percent in March, exceeding the central bank’s 2 percent target for a sixth month.

“Growth is extremely weak and it is very hard to see any inflationary pressure,” Danske Bank (DANSKE) AS said in a note to clients. “We therefore believe that there is plenty of room for monetary easing in the Czech Republic, especially taking into account that the Czech government is now pushing through further austerity measures.”

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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