Czechs Cut Rates Close to Zero as Recession Tames Inflation

The Czech central bank cut its main interest rate to close to zero and vowed not to raise borrowing costs for a “longer” period as the nation’s second recession since 2009 tames inflation.

The Ceska Narodni Banka reduced the main two-week repurchase rate to a record-low 0.05 percent, almost three- quarters of a point below the euro-area benchmark. Seven economists in a Bloomberg survey had predicted a lowering of borrowing costs from the previous 0.25 percent rate, while 15 analysts expected no change.

Czech policy makers are considering using other tools to relax conditions after lowering the benchmark rate from 0.75 percent this year to near the zero level seen in Japan and Switzerland. With the economy mired in a slump amid Europe’s debt crisis, central bank Governor Miroslav Singer reiterated today that weakening the koruna will be the next move should further monetary easing be required.

“The bank will wait before restoring rates to above the technical-zero level until it sees significant inflationary pressures,” Singer said at a press conference today. The bank’s new forecast assumes an increase in market interest rates in 2014, he said.

Weaker Koruna

The koruna, which weakened as much as 0.5 percent against the euro after the rate announcement, traded 0.2 percent weaker at 25.134 as of 3:58 p.m. in Prague, according to data compiled by Bloomberg. Interest-rate cuts have helped fuel a Czech bond rally. The yield on five-year koruna notes fell 21 basis points, or 0.21 percentage point, to a record-low 0.792 percent.

Monetary authorities in eastern European Union members are following central banks in the U.S. and U.K. in easing policy to tackle an economic slowdown as Europe fights a debt crisis. Hungary’s central bank cut its main interest rate by a quarter- point to 6.25 percent on Oct. 30, the third reduction in as many months.

The Czech economy is suffering from weak domestic demand after the government cut investments and raised taxes to trim the budget gap.

Czech gross domestic product fell 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, after consumers responded to the worsening economic outlook by spending less.

New Outlook

The central bank kept its forecast for a 0.9 percent contraction of GDP this year and cut next year’s prediction to 0.2 percent growth from 0.8 percent. Headline inflation next year will hover “slightly above” the target of 2 percent, the bank said in a quarterly update of its forecasts today.

Monetary-policy inflation, defined as price growth adjusted for changes in indirect taxes, will be between 1 percent and 2 percent next year, the bank said.

Consumer prices grew 3.4 percent in September, less than the central bank’s estimate of 3.5 percent. The inflation rate has been above the 3 percent upper end of the bank’s tolerance range this year because of factors outside the influence of monetary policy, including a sales-tax increase and global commodity costs.

Policy Inflation

Inflation relevant for monetary policy was 2.1 percent in September, according to central bank data.

While the country maintains a foreign-trade surplus, export growth was the slowest since the end of 2009 in the second quarter as the euro area’s crisis curbed purchases of electronic goods and cars. Exports account for three-quarters of Czech GDP, with about 80 percent going to the 27-nation EU.

Singer declined to give any details on possible foreign- exchange interventions.

With the Czech “government wedded to fiscal austerity, monetary policy will have to provide the maximum possible support,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London, said in a note after the decision. “At the same time, a move toward unconventional measures may not happen quickly. Despite today’s decision, the CNB remains a highly conservative institution.”

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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