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Czech Central Bank May Begin Rate-Increase Debate Tomorrow

The Czech central bank may discuss tomorrow whether to move forward interest-rate increases after two board members suggested a tightening of monetary policy is needed earlier than forecast.

While all 16 analysts surveyed by Bloomberg expect the Ceska Narodni Banka to leave its two-week rate unchanged at a record-low 0.75 percent, attention is focused on the post meeting news conference and minutes to be released Oct. 1.

The “interpretation of the central bank’s overall view, presented at the news conference and later in the minutes from the board meeting, will certainly be interesting,” Michal Brozka, an analyst at Raiffeisenbank AS in Prague said in a Sept. 20 report.

The bank cut its benchmark rate by 3 percentage points in the past two years as the country suffered its worst recession in two decades. Since an Aug. 5 meeting, two members have suggested policy makers may raise borrowing costs, a quarter-point lower than European Central Bank’s main rate, before the second half of 2011 as signaled by the bank’s latest forecast.

Board member Eva Zamrazilova said a rate increase should be discussed as soon as possible because low borrowing costs create a “bad allocation of capital,” according to an Aug. 24 interview in the newspaper Lidove Noviny.

Probably Raise

Robert Holman, another of the seven policy makers, told Tyden magazine on Aug. 30 that the bank will probably raise the main rate to 1 percent at the end of this year or at the beginning of 2011.

The Czech economy, where exports account for about 70 percent of output, last year emerged from the worst recession since the end of communism in 1989. Gross domestic product expanded an annual 2.4 percent in the three months through June, the fastest pace in eight quarters.

August’s inflation rate was 1.9 percent, unchanged from a 16-month high in July. The bank sees annual price growth exceeding its 2 percent target this year before dropping to 1.9 percent in the third and fourth quarters of 2011.

GDP data showed 0.8 percent growth of household consumption in the second quarter, which the central bank said was a “surprising” increase.

Signals from the economy don’t suggest “we are in for a rate hike already,” Martin Lobotka, an analyst at Ceska Sporitelna AS, the Czech unit of Erste Group Bank AG. “But the discussion at the meeting may foreshadow the more important meeting in November, when the new forecast will be unveiled,” Lobotka said.

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