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Czech Policy Makers Hold Rates, One Demanded Increase

The Czech central bank kept its benchmark interest rate unchanged at a record low as one board member cast the first vote for an increase following two years of policy loosening.

All 16 analysts in a Bloomberg survey forecast the two-week repurchase rate to stay at 0.75 percent, a quarter-point lower than the European Central Bank’s main rate. The Ceska Narodni Banka cut its main rate by 3 percentage points between August 2008 and May 2010 as the country suffered its worst recession in two decades, with the last quarter-point reduction in May.

Since an Aug. 5 meeting, data have shown accelerating economic growth with a rebound in household consumption in the second quarter, and two policy makers have suggested rates may need to rise before the second half of 2011 as signaled by the bank’s latest forecast.

The board member who voted to raise rates “may hint at the formation of a hawkish wing within the board,” said Martin Lobotka, an analyst at Ceska Sporitelna, the Czech unit of Erste Group Bank AG. “This wing is still not large, but given previous comments in the press of some bankers and solid second half data, it may get larger at the next meeting in November when the new prognosis will be unveiled.”

‘Bad Allocation’

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.

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.

Voting of individual board members will be revealed in the minutes of the meeting to be published on Oct. 1.

“A strong majority of the board members perceived risks” to the inflation forecast “as balanced,” Governor Miroslav Singer told a news conference. “Some board members expressed a view that pro-inflationary risks may be slightly prevailing because of continued economic recovery here and in Europe.”

The main anti-inflationary risks included prepared cuts in budget spending, which may tighten the “policy mix” more than the central bank currently expects and influence future rate decisions, Singer said. A labor-market recovery as the unemployment rate declines may be a risk of faster price growth, he said.

The Czech economy is showing “practically non-existent” inflationary pressures stemming from demand and price growth will probably undershoot the central bank’s 2 percent target, while fiscal cuts combined with Europe’s debt crisis are a downside risks to economic recovery, Stanislava Pravdova, an analyst at Danske Bank A/S said in a report.

“We see no major reason why the bank should worry about inflationary pressures getting out of hand din the immediate future,” Pravdova said.

Budget Cuts

Prime Minister Petr Necas’ government approved earlier today a 2011 budget draft, which sees a 17 percent reduction in the deficit to 135 billion koruna ($7.3 billion). The Cabinet wants to reduce money allocated for wages, investments and social spending to narrow the fiscal gap.

The Czech koruna was trading at 24.629 against the euro after the rate announcement, down 0.2 percent as of 5:03 p.m. in Prague. It has been the world’s best-performing currency in the past three months.

Inflation was at 1.9 percent in August, unchanged from a 16-month high in July. The bank sees headline inflation exceeding its 2 percent target this year before dropping to 1.9 percent in the third and fourth quarters 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.

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

Economic growth will probably slow “in the months ahead” and the fiscal tightening is likely to keep the interest rates on hold until the end of the first quarter of 2011, Anne-Francoise Bluher, an analyst at Komercni Banka AS, the Prague-based unit of Societe Generale SA, wrote in a report.

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