Czech Central Bank `Hawks' Threaten to Derail Recovery, Danske Bank Says

Czech policy makers who have said interest rates are too low “might be wrong” as inflation remains subdued and an early rate increase may “risk derailing the fragile recovery,” Danske Bank A/S said today.

Czech record-low rates are “appropriate -- or even too high,” Lars Christensen, chief analyst at Danske in Copenhagen, wrote in a report, noting the “hawks are getting a little too much ahead of the curve. We continue to recommend that investors should be positioned for lower market rates and yields.”

Central bank board members Kamil Janacek and Eva Zamrazilova last week called for higher rates to prevent asset bubbles, while Robert Holman told Tyden magazine the benchmark rate will probably rise to 1 percent from 0.75 percent at the end of this year or at the beginning of next.

“If the” bank “were indeed to hike in the short-run then we would expect the actual economic development would force” the bank “to backtrack on such monetary tightening,” Christensen wrote. “Hence, any rate hike should in our view be considered as a long-term buying opportunity for short-dated Czech bonds.”

Vice-Governor Vladimir Tomsik told Reuters today the bank may hold rates until the second half of 2011 as planned fiscal austerity may tame inflation. The economy expanded an annual 2.2 percent in the second quarter, missing estimates, and a gauge of consumer confidence fell to minus 11.8 in August from minus 7.3 in July, government data showed this month.

‘Losing Steam’

“It is clear from most macroeconomic indicators that the recovery in the Czech economy is losing steam, further reducing the need for monetary tightening,” Christensen wrote. “There is even an argument that the central bank should ease monetary policy further going ahead.”

In an Aug. 18 report, Danske said it sees rates unchanged for 12 months.

The bank left interest rates unchanged at its last meeting on Aug. 5 and said it may delay tightening policy as inflation remains slower than its target. Governor Miroslav Singer said the same day the “recovery isn’t that strong.”

While the inflation rate jumped to 1.9 percent in July, the highest in 16 months, from 1.2 percent in the previous month, it remained below the central bank’s 2 percent target. The central bank forecasts inflation below the target in the third and fourth quarter of next year.

To contact the reporter on this story: Krystof Chamonikolas in Prague at

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