Czech Policy Maker Sees Interest Rate Rising Earlier

Czech policy maker Robert Holman expects the central bank to start increasing interest rates earlier than suggested in its outlook as the economy will probably grow faster than forecast.

The Ceska Narodni Banka has kept the two-week repurchase rate at a record-low 0.75 percent since May after cutting it a total of 3 percentage points in less than two years to counter the impact of the global crisis that pushed the country into the worst recession since the end of communism two decades ago.

The central bank signaled in its latest forecast on Nov. 4 that interest-rate increases may be postponed until near the end of next year from the previously expected start of monetary tightening about the middle of the year. The bank, which targets inflation, forecast annual price growth close to its 2 percent target in the final quarter of 2011.

“Our latest forecast says that the period of interest-rate increases will probably start near the end of next year, but I think that it will start earlier, maybe at around the middle of next year,” Holman, a professor in economic theory, said in an interview in Prague yesterday. “I think we will start increasing rates sooner than what our latest forecast assumes.”

Holman’s term on the central bank’s board will end in February. President Vaclav Klaus, who named Holman to the board in 2005, has the sole right to decide whether to reappoint him for a second term or name someone else to the post.

Czech government bonds maturing in 2020 fell to 99.500 after Holman’s comments, from 99.900. The bonds rebounded to their opening level as of 3:25 p.m. in Prague. The forward-rate agreements indicating three-month interbank rate in 6-month time rose to 1.520 percent, from 1.495 percent in the previous day.

Rising Demand

The Czech economic recovery accelerated this year with growth at 2.8 percent in the three months through September, the fastest in nine quarters. The rebound was initially led by rising demand for exports, including cars made by Volkswagen’s Skoda Auto AS, while domestic demand contributed the most to growth in the third quarter.

The bank lowered its forecast for 2011 GDP growth to 1.2 percent from a previous 1.8 percent, saying the government’s plan to curb state spending will slow the economy’s expansion. The Finance Ministry on Nov. 1 also revised its estimate for 2011 to 2 percent, from the 2.3 percent rise in GDP that served as the basis for calculating next year’s budget.

‘More Pessimistic’

Prime Minister Petr Necas’ government, in office since July, plans to halve the public-finance deficit to less than the European Union limit of 3 percent of GDP by 2013. The Cabinet’s latest estimate sees the fiscal deficit at 5.1 percent of GDP this year and it targets a shortfall of no more than 4.6 percent in 2011.

“Our forecast is more pessimistic than the Finance Ministry’s expectation because we are more conservative in estimating investments and consumption,” said Holman. “My personal view, which is slightly differing from our official forecast, is that economic growth will be stronger next year. I wouldn’t be so conservative in estimating investments.”

Holman said he expected a revival in fixed investments next year. Strong growth in Asia is helping to drive growth in Germany, the Czech Republic’s main trading partner, which should also help boost the economy, Holman said.

Exploring Markets

“Furthermore, our automotive industry is also quite flexible in exploring new markets and it is successfully exporting to Asia,” he said.

Skoda Auto AS, the largest Czech exporter, said on Dec. 9 it will post record sales this year, fuelled by sales growth in China, India and Russia and further expansion in east Europe. Sales in the first 11 months rose 12.3 percent to 702,400 vehicles, the company said, which is more than last year’s total sales of 700,000 cars.

Czech inflation was 2 percent in November, the same as in the previous two months, matching the central bank’s target. Monetary policy inflation, which is price growth adjusted for the impact in changes in indirect taxes, was 0.9 percent, the central bank said.

“Current monetary-policy settings are appropriate,” said Holman. “There aren’t such inflation risks that would require an increase in rates at the next monetary meeting, or at the beginning of next year, and I don’t think it will happen.”

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