Czech Central Bank Sees Earlier Rate Increase as ECB Borrowing Costs Rise

The Czech central bank moved forward its forecast for the start of interest-rate increases after borrowing costs in the neighboring euro area rose last month.

The Ceska Narodni Banka voted yesterday to keep the two- week repurchase rate at 0.75 percent, a half-point below the European Central Bank’s main rate, rejecting a motion for a quarter-point increase with a 5-2 vote. The bank forecast higher market interest rates from the fourth quarter, compared with a previous prediction for the first quarter of 2012.

Czech policy makers have kept rates unchanged for a year as inflation holds below the bank’s 2 percent target. The ECB last month raised its main rate for the first time in almost three years, changing one of the variables in the economic models used by central bankers in Prague.

“The forecast, or the way it reacts to changes in external trends and to the expectations of changes in external trends, has moved an increase in rates slightly forward,” Governor Miroslav Singer told reporters after the rate decision.

The Czech koruna has gained 3.8 percent against the euro this year, the third-best performance among the 25 emerging- market currencies tracked by Bloomberg. Forward-rate agreements locking in three-month interest rates in three months, dropped to 1.37 percent today, from 1.44 percent before the rate decision. The three-month Prague interbank offered rate, or Pribor, was at 1.21 percent.

Monetary authorities around the world are struggling to contain inflation pressures caused by higher oil and food prices. Several countries in eastern Europe, including Hungary, Poland and Russia, started raising interest rates since last year to slow inflation.

Trichet’s Signal

ECB President Jean-Claude Trichet signaled yesterday that the bank will wait until after June to raise interest rates again following a quarter-point increase in April. Policy makers left the benchmark rate unchanged at 1.25 percent yesterday.

The Czech central bank expects higher rates to help keep inflation at 2.2 percent in the second quarter of 2012 and at 2.1 percent in the following three months, according to the forecast released yesterday.

Rates may rise as soon as the third quarter “if a stream of positive data releases continues in coming months,” said David Marek, chief economist at Patria Finance, a Prague-based brokerage owned by KBC Groep NV. (KBC) “The timing can be influenced by the ECB policy and the spread between Pribor and Euribor.”

The Czech central bank didn’t change its forecasts for three-month Pribor, leaving them at 1.3 percent for 2011 and 2 percent for 2012.

Forecast Assumptions

The bank included assumptions of further policy tightening in the euro-area in the forecast. It sees the three-month Euro interbank offered rate, or Euribor, at 1.6 percent in 2011 and at 2.6 percent in 2012, an increase from the previous forecasts of 1.2 percent and 1.7 percent, respectively.

The yield on the December Euribor futures contract fell 17 basis points yesterday to 2.01 percent as investors curbed bets on higher interest rates. A basis point is 0.01 percentage point.

Czech policy makers have shown differing views on inflation risks, with some board members advocating higher borrowing costs. Eva Zamrazilova voted for a quarter-point increase at the March 24 meeting. Kamil Janacek said April 6 he wanted to lift rates in May. A detailed record of yesterday’s vote will be published May 13.

External Pressures

The Czech economy isn’t generating inflation pressures as consumer demand remains subdued, Singer said yesterday as the bank cut its forecast for growth in gross domestic product to 1.5 percent for 2011 from 1.6 percent. The 2012 forecast was reduced to 2.8 percent from 3 percent.

“The external environment is principally bringing pro- inflationary pressures,” Singer said.

Inflation slowed to 1.7 percent in March from 1.8 percent in February, below the central bank’s 2 percent target for a third month.

The unemployment rate dropped to 9.2 percent in March from a six-year high of 9.9 percent in February 2010. Improvement in the job market traditionally lags behind a revival in economic growth because businesses focus on increasing productivity rather than hiring new employees.

Anti-inflationary trends in Czech economy prevail over pro- inflationary pressure from abroad, which may let policy makers be more restrained with monetary tightening, said Martin Lobotka, an analyst at Ceska Sporitelna, the Czech unit of Erste Group Bank AG.

“The Czech National Bank currently doesn’t share the urgency about rate decisions with the ECB, and it will stay so for the rest of the year,” Lobotka said.

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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