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Czech Policy Maker Says Rates Could Rise This Year

The Czech central bank may consider increasing interest rates before the end of the year if economic recovery is stronger than forecast, policy maker Eva Zamrazilova said.

The Prague-based Ceska Narodni Banka unexpectedly cut the benchmark two-week interest rate on May 6 by a quarter-point to 0.75 percent, below the European Central Bank’s main rate, saying inflation will be under its 2 percent target in 12 to 18 months. It also signaled that rates may be steady until end-2010 and start rising in 2011 when economic growth should accelerate to 1.8 percent from 1.4 percent forecast for this year.

“Interest rates are extremely low and the question now is how long a time period is ideal for this setting,” Zamrazilova, who wasn’t at the May meeting, said in an interview on June 10 and cleared for publication today. “The time is coming to think proactively about the timing of starting to increase rates.”

The Czech economy expanded on an annual basis in the first three months for the first time in five quarters, with gross domestic product growing 1.1 percent from a year earlier after a 3.2 percent contraction in the previous quarter, the statistics office said on June 9. Separate data showed the inflation rate rose to 1.2 percent in May, from 1.1 percent in the previous month, above the central bank’s forecast of 0.9 percent.

Recovery Signs

East European countries are emerging from the worst recession since the end of communism. Trade is picking up after the credit crisis curbed investments and companies cut jobs. The Czech Republic, home to Skoda Auto AS and Hyundai Motor Co. plants, gained from a pickup in demand in the euro area, its main trading partner, though risks remain if the recovery in the 16-nation currency-area sputters.

“The latest statistics, and the signals coming from the Czech economy, show that the recovery is under way,” Zamrazilova said. “Of course, as we had anticipated, the recovery is driven mainly by foreign demand because of the nature of our small and open economy.”

The koruna appreciated as much as 0.6 percent and traded up 0.4 percent at 25.639 per euro as of 4 p.m. in Prague. A close at that level would be its strongest this month.

The Czech Republic country had its 16th consecutive trade surplus in April and industrial output rose to a 30-month high, driven by car production. Auto-industry output grew 29 percent in the first quarter and sales abroad increased 23 percent. Data showed on June 8 that the unemployment rate dropped to a six-month low in May.

Next Forecast

“What will be important is the next forecast at the beginning of August as this will show whether the recovery is confirmed,” said Zamrazilova. “If the recovery is faster than expected in previous forecasts, then from my personal point of view, it would imply that rates may increase faster than currently anticipated, possibly before the end of the year.”

GDP data showed a revival in household consumption, which may point to stronger inflation risks than the central bank had expected, Martin Lobotka, an analyst at Ceska Sporitelna, the Czech unit of Erste Group Bank AG, said on June 9.

“Household consumption is still in negative territory on an annual basis, but the decline isn’t as significant as expected, so it shouldn’t be a strong constraint for economic growth as may have been expected,” said Zamrazilova. “This is underscored by the latest statistics from the labor market which show a decline in the unemployment rate, which also wasn’t expected.”

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