The Czech central bank will probably keep its benchmark interest rate at a record low for a 14th month as the euro area’s debt crisis threatens the eastern European country’s economic recovery. The Ceska Narodni Banka will leave the two-week repurchase rate at 0.75 percent, below the European Central Bank’s benchmark, according to 20 of 22 economists surveyed by Bloomberg News. Two predicted a quarter-point increase, which would be the first increase in borrowing costs in 2 ½ years. The euro area’s debt crisis, which is threatening to spread to Italy, has reduced chances Czech policy makers will follow their counterparts across Europe in raising borrowing costs to curb inflation. Even with the Czech economy expanding faster than projected, a rate increase is not needed as demand-driven inflation remains under control and the outlook for the euro area’s economy is risky, economists said. “Tremendous uncertainty over the development in the eurozone speaks in favor of stable Czech rates,” said Radomir Jac, an economist at Generali PPF AS in Prague. “Even as some domestic data may signal somewhat stronger inflationary risks, the external factors have become disinflationary in the past.” In eastern Europe, Romania yesterday left its benchmark rate at 6.25 percent for a 10th meeting, following hold decisions in Poland and Hungary, amid the U.S. and European debt crises. The Russian central bank is expected to do the same as early as today, as is the ECB. The Czech central bank will probably raise its projection for 2011 economic growth closer to 2 percent in its next quarterly forecast, which will be considered in today’s monetary-policy debate. At the same time, the bank will probably raise its forecast for inflation, which it saw at 2.2 percent in the second quarter of 2012. VAT Effect Still, the higher inflation projection will be driven mostly by higher sales taxes, rather than a sign of surging domestic demand, which will continue to suffer from the government’s austerity measures, economists said. The inflation rate fell to 1.8 percent in June, after rising commodity prices pushed the rate to 2 percent in the previous month, the highest this year. The central bank in its last quarterly forecast released predicted the May rate at 1.7 percent. A lower outlook for the Euribor, the euro interbank offered rate, may help delay the rate increase, economists including Jac said, echoing comments by central bank Vice Governor Vladimir Tomsik in a July 27 interview. The increase, which was signaled in the May forecast, may not happen until next year, Tomsik said. After the ECB raised its benchmark rate to 1.5 percent in July, the debt crisis has caused investors to cut expectations for a further increase in euro-area market rates. Falling FRAs Forward-rate agreements locking in three-month euro-area interest rates in nine months time have dropped to about 1.6 percent from 2.1 percent on May 5, when the Czech central bank published its latest economic forecasts, according to data compiled by Bloomberg. Investors have also scaled back bets on higher Czech interest rates, with forward-rate agreements locking in three- month interest rates in six months dropping below 1.4 percent from 1.62 percent on May 5. Forwards locking in three-month rates in nine months have since fell about 0.4 percentage point. Czech policy makers have offered differing views on inflation risks, with some saying the economic recovery may stoke price pressures, warranting higher borrowing costs now. Two policy makers voted for a quarter-point rate increase at the last meeting on June 23. Rate Debate Some economists share this view, saying the current positive inflation data and concern about the euro-region’s economy shouldn’t prevent the central bank from increasing the key rate as early as today. Policy makers should respond to the possibility that inflation will pick up in a longer period, between 12 and 18 months from now, said Lubos Mokras, an economist at Ceska Sporitelna AS. The long phase of an “extremely low” benchmark rate is set to translate into a lending boost in the near future, said Ales Michl, an economist at Raiffeisen Bank in Prague, who is also predicting a quarter-point increase in the key rate today. “The amount of money in the economy is growing faster and banks are ready to lend,” he said. “Such a boost may have inflationary consequences.” To contact the reporter on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net. To contact the editor responsible for this story: James Gomez at jagomez@bloomberg.net.

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