BLBG:Czechs Keep Zero Rates as Policy Moves to Currency Sales
Czech central bankers kept the main interest rate at effectively zero as the second recession since 2009 sparked debate on whether to weaken the koruna to further ease monetary conditions.
The Ceska Narodni Banka held the two-week repurchase rate at 0.05 percent, almost three-quarters of a percentage point less than the euro-area benchmark, at a board meeting today, in line with the forecast of all 16 analysts in a Bloomberg survey. The bank will comment on the decision at a news conference at 2:30 p.m. in Prague.
After three rate cuts this year, the Czech central bank is in uncharted territory as weakening domestic demand tames inflation and pushed the economy into its second recession since 2009. Several policy makers, including Governor Miroslav Singer, said the bank may sell the koruna to further relax conditions as the slump risks stretching into the longest ever.
“Markets’ attention will focus on any comments on the koruna/euro exchange rate,” Miroslav Frayer, an economist at Komercni Banka AS (KOMB) in Prague, said today before the rate announcement. “Stronger comments will have a potential to move the exchange rate, considering that data from the domestic economy published this month were anti-inflationary.”
The koruna has lost 2.5 percent against the euro since Sept. 17, one day before Singer first said the bank may use sales of the unit to ease monetary conditions. That’s the sixth- worst performance among major emerging-market currencies tracked by Bloomberg in the period. It was 0.1 percent stronger at 25.159 per euro at 10:34 a.m. today in Prague.
Steady Rates
Most Czech central bankers agree the main interest rate should be kept at the current level until inflation risks rise significantly, according to minutes from the November meeting.
Monetary authorities in central Europe are easing policy to alleviate the impact of the sovereign-debt crisis in the euro area, the region’s main trading partner. Hungary cut its main rate to 5.75 percent yesterday, the fifth reduction in as many months, while Poland’s central bank Governor Marek Belka on Dec. 11 called for more interest-rate cuts from 4.25 percent.
Czech monetary policy may need to be more relaxed in 2013 to ensure that inflation develops as the central bank forecasts, according to Singer.
“There may be a need, at around the middle of next year, for monetary policy to be even more relaxed than now,” he said Nov. 15, reiterating that the bank’s goal is price stability.
Weak Economy
The economy is suffering from weak domestic demand as households and businesses cut spending due to government austerity programs and the euro-area debt crisis. Output shrank for a third three-month period from July to September, one quarter short of matching the longest decline ever.
Gross domestic product fell a quarterly 0.3 percent from April-June, compared with a revised 0.4 percent decline in the previous three months, the Statistics Office in Prague said Dec. 7. GDP contracted 1.3 percent from a year earlier, also a third straight decline and the worst reading since 2009.
Inflation eased to 2.7 percent in November, the slowest this year, from 3.4 percent in the previous month. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 1.5 percent.
Inflation Target
Inflation next year will hover “slightly above” the 2 percent target, the central bank said in a quarterly update of its forecasts published on Nov. 1. It sees monetary-policy inflation between 1 percent and 2 percent next year.
Selling the currency is the preferred next policy tool, after exhausting the room for cutting interest rates, because of the “proven and quick reaction of the economy to depreciation of the koruna exchange rate,” Tomas Holub, the head of the central bank’s monetary and statistics department, wrote in a column for the Euro magazine posted on the central bank’s website on Dec. 3.
Interventions will “certainly be on the agenda” at the December meeting, while most policy makers will probably want to see an impact analysis of koruna sales and wait for the first- quarter data before endorsing the move, analysts at Ceska Sporitelna AS, the Czech unit of Erste Group Bank AG (EBS), said in a report before today’s board meeting.
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
