Czech Austerity Splits Central Bankers With Rate-Cut Demand
The Czech government’s austerity drive is raising the prospect of policy makers lowering borrowing costs for the first time in two years as the economy struggles to emerge from a recession.
The Ceska Narodni Banka left the benchmark two-week repurchase rate at a record-low 0.75 percent yesterday, having left it steady since a cut in May 2010. Four rate setters voted for no change, two sought a decrease to 0.5 percent and one wanted an increase to 1 percent, Governor Miroslav Singer told reporters in Prague after the decision yesterday.
“Support for more easing was the real surprise,” Roderick Ngotho, an economist at Royal Bank of Scotland Group Plc in London, said in an e-mail. “A combination of high inflation and disappointing economic data led to the unprecedented split among policy makers in their latest meeting.”
Austerity measures aimed at stemming Europe’s debt crisis have pushed economies from the Netherlands to the Czech Republic back into recession. Policy makers in Prague signaled potential monetary easing as European Central Bank President Mario Draghi yesterday left open the option for further stimulus if the euro area’s economy continues to deteriorate.
Investors raised bets on a Czech interest-rate cut after yesterday’s meeting, with forward-rate agreements fixing the three-month interbank rates in six months falling to 1.044 percent today from 1.223 percent on May 2, according to data compiled by Bloomberg.
The three-month interbank offered rate, or Pribor, was 1.24 percent today. The koruna weakened as much as 0.4 percent to the euro yesterday, trading little changed at 25.038 against Europe’s common currency as of 3:27 p.m. in Prague.
The outlook for the economy and interest rates is shaped by Prime Minister Petr Necas’s plan to push through measures including a sales-tax increase to cut the fiscal deficit to less than the European Union limit of 3 percent of gross domestic product next year. The plan contributed to his ruling coalition unraveling last month.
Borrowing costs have remained unchanged as the economy slid into a recession in the second half of 2011 and a tax increase at the start of this year spurred inflation to the fastest in more than three years.
While raising the levy a second time in as many years would boost inflation, it also would cut household demand, curtail economic growth and point to lower interest rates, the central bank said yesterday.
“The Czech economy will stagnate this year because of a significant slowdown in foreign demand and continued domestic fiscal consolidation,” Singer said. “Domestic factors, including weak domestic demand and slow wage growth, are currently taming price developments.”
The economy, which exports about 80 percent of its output, contracted in the third and fourth quarters of 2011 as government spending cuts outweighed demand abroad for Czech-made vehicles, car parts and electronics goods. The inflation rate rose to 3.8 percent in March, exceeding the central bank’s 2 percent target for a sixth month.
“Real-economy developments in the euro area, together with fiscal measures currently making their way through the Czech government, are returning the rate-decline scenario again,” Martin Lobotka, an analyst at Ceska Sporitelna, Erste Group Bank AG (EBS)’s Czech unit, said in an e-mail yesterday.
While the economy returned to a recession, Necas’s 20- month-old administration wants to push through 57 billion koruna ($3 billion) worth of budget measures to narrow the deficit to 2.9 percent of GDP next year from 3.1 percent last year. Necas on April 27 won backing for his austerity program with the support of lawmakers who split from a former coalition party.
Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, was 2.7 percent in March, the central bank said. It forecasts monetary-policy inflation moving “slightly below” the 2 percent inflation target in 2013.
The central bank left its economic-growth forecast unchanged from the previous outlook in February, when it saw a stagnant economy this year and a 1.9 percent expansion in 2013. It said the inflation rate in the second quarter of 2013 will be 1.5 percent, before falling to 1.4 percent in the next three- month period.
The Czech central bank has prepared an “alternative” forecast scenario, which assumes the government pushing through the value-added tax increase as of next year, projecting a deeper decline in interest rates in 2013, before they rise again in the second half of the year.
“Given there are good chances of an increase in VAT next year, we may need to start looking at the alternative scenario more closely,” Morgan Stanley (MS) analysts Pasquale Diana and Jaroslaw Strzalkowski said in a note to clients. “Lower implied rates in the alternative scenario than in the base scenario therefore introduce some downside risks to our forecast that rates will be on hold for an extended period of time.”
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