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Czech Bank Leaves Rates Unchanged, Signals Stability

( 24 / June / 2010 )

The Czech central bank left its benchmark interest rate unchanged after an unexpected cut in May and said borrowing costs were likely to hold steady in the near term.

The Prague-based Ceska Narodni Banka kept the two-week repurchase rate at 0.75 percent today, a quarter-point lower than the European Central Bank’s main rate. All 17 economists in a Bloomberg survey forecast no change at the meeting, the last for Governor Zdenek Tuma, who will step down at the end of the month.

East European countries are emerging from the worst recession since the end of communism. Trade is picking up after the credit crisis curbed investments and companies cut jobs. The Czech Republic, home to Skoda Auto AS and Hyundai Motor Co. plants, gained from a pickup in demand in the euro area, its main trading partner.

“New information is generally in line with the overall picture of the forecast and the risks are roughly balanced,” Tuma told reporters in Prague. “It’s hard to anticipate the next direction of interest rates. Stability of rates appears to be most likely for the nearest future.”

‘Slightly Weaker’

The Czech economy expanded an annual 1.1 percent in the first three months, the first increase in five quarters. Tuma said “slightly weaker” koruna was one of the main inflation risks, while lower interest rates abroad and developments on the job market were among factors that may tame consumer price growth.

The koruna gained as much as 0.4 percent today versus the euro and traded 0.3 percent higher at 25.738 as of 4:10 p.m. in Prague. The central bank’s latest forecast saw koruna’s exchange rate at 25.3 for 2010.

“Since the last meeting, data such as unemployment, consumer and producer inflation and the koruna rate have developed more in a pro-inflationary direction than compared with the central bank forecast,” Michal Brozka, an analyst at Raiffeisenbank AS in Prague, said in a note. “On the other hand, there’s a bigger chance for tighter budget policy, which is an argument for keeping rates low for a longer period.”

Economic Recovery

The country had its 16th consecutive trade surplus in April and industrial output rose to a 30-month high, driven by car production. Auto-industry output grew 29 percent in the first quarter and sales abroad increased 23 percent. The unemployment rate dropped to a six-month low in May.

The inflation rate rose to 1.2 percent in May from 1.1 percent in the previous month, above the central bank’s forecast of 0.9 percent.

The central bank signaled in its May forecast that interest rates may be steady until end-2010 and start rising in 2011 when economic growth should accelerate to 1.8 percent from a 1.4 percent estimate for this year. Tuma said inflation will be “near” the central bank’s 2 percent target in 12 to 18 months.

The bank, though, may consider tightening the policy before the end of the year if economic recovery is stronger than forecast, policy maker Eva Zamrazilova said in a June 10 interview.

Source: Prague Daily Monitor

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