Koruna Drops as Below-Target Inflation Fuels Intervention Talk

The koruna weakened as Czech inflation stayed below the central bank’s target for a third month, fueling speculation on whether policy makers will try to stimulate the economy by weakening the currency.

The inflation rate was 1.7 percent, unchanged from February and matching the median estimate in a Bloomberg survey, statistical data showed today. The figures were “a bit on the anti-inflationary side” without approaching deflation, Martin Lobotka, a Prague-based analyst at Erste Group Bank AG’s Ceska Sporitelna unit, wrote in an e-mailed report today.

“The central bank will thus remain calm, it will not do any currency interventions unless the economy contracts at about the rate it did in 2012 and/or the koruna strengthens below 25” per euro, Lobotka wrote. Gross domestic product shrank 1.4 percent in the fourth quarter from a year earlier.

The Czech currency depreciated 0.2 percent to 25.767 per euro by 10:28 a.m. in Prague, extending its decline this year to 2.6 percent. Yields on the country’s three-year bonds rose four basis points, or 0.04 percentage point, to 0.421 percent.

The Ceska Narodni Banka in Prague, which cut borrowing costs three times to 0.05 percent last year, has debated publicly and in private whether to engage in currency interventions amid a record-long recession.

The more “the central bank has to correct its inflation expectations downwards, the more likely direct currency-market interventions in the second half of 2013 are becoming,” Carolin Hecht, a Frankfurt-based strategist at Commerzbank AG, wrote in an e-mailed report before the inflation figures.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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