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Czech Interest Rates Kept at Record Low in Close Vote

Pedestrians walk past the Czech central bank in Prague
Pedestrians walk past the Czech central bank in Prague. Photographer: Vladimir Weiss/Bloomberg

The Czech central bank board voted 4-3 today to leave the benchmark interest rate at a record low, showing the debate on the timing of policy tightening is intensifying as inflation and an economic recovery gather pace.

The Ceska Narodni Banka kept the two-week repurchase rate at 0.75 percent, in line with the forecasts of all 18 analysts in a Bloomberg survey. Three board members voted for a quarter-point increase, Governor Miroslav Singer told a news conference. The bank has kept rates stable since May after cutting by 3 percentage points in less than two years as the global crisis pushed the country into the worst recession in two decades.

Policy makers globally are struggling to weigh accelerating inflation, driven by food and fuel prices, against an economic recovery. Investors have increased bets the Prague-based Czech central bank will lift interest rates at around the middle of the year, disregarding the bank’s forecast of market borrowing costs rising around the end of 2011.

“The vote was surprising,” said Martin Lobotka, an analyst at Ceska Sporitelna, the Prague-based unit of Erste Group Bank AG. “Doves prevailed only by a small margin.”

Expiring Terms

The bank didn’t publish individual votes of the board members and, Lobotka said, the policy debate may differ at the next meeting on March 24 as the terms of two policy members, Robert Holman and Pavel Rezabek, expire on Feb. 13. President Vaclav Klaus will decide whether to re-appoint or replace them.

The koruna firmed as much as 0.8 percent to the euro after the result of the vote was published. It traded at 23.982 as of 4:31 p.m. in Prague, up 0.6 percent on the day. The currency has gained 4.3 percent to the euro since the start of the year, making it the world’s best-performing currency in the period, according to Bloomberg data.

The central bank revised its economic growth and inflation forecasts upward in an acknowledgement of external pressures. It now sees gross domestic product rising 1.6 percent compared with its November estimate of 1.2 percent. GDP growth in 2012 will accelerate to 3 percent, it said, up from a previous forecast of 2.5 percent.

The bank sees inflation in the first quarter of 2012 at 2 percent, matching its target, while price growth should quicken to 2.1 percent in the following three months. The inflation rate rose to 2.3 percent in December, the highest since March 2009 and exceeded the central bank’s target of 2 percent, driven by higher costs of food and gas.

Inflation risks “are balanced overall, although it’s maybe worth noting that the bank board views pro-inflationary risks as increasing,” Singer said.

‘Gradual Increase’

The forecast assumes “stable market interest rates near current levels, followed by a gradual increase from the end of 2011,” the central bank said in a statement. The bank doesn’t publish an official policy bias and Singer said board decisions may differ from the forecast with the koruna affecting policy.

The bank sees the koruna trading at 24.2 to the euro on average in 2011 and 23.7 on average in the following year, according to the updated forecasts.

Forward-rate agreements indicating the three-month interbank rate in six months rose to 1.71 percent today, from 1.65 percent before the rate decision. The three-month Prague Interbank Offered Rate, or PRIBOR, increased to 1.21 at 1.20 percent, according to Bloomberg data. The forward rate was 1.48 percent at the beginning of December, when the PRIBOR stood at 1.22 percent.


East Europe is recovering from the impact of the worst global recession since World War II, benefiting from improved demand for goods produced or assembled in the region, including Nokia Oyj phones and cars made by Volkswagen AG’s Audi and Skoda Auto AS units.

Some central banks in east Europe began tightening policy last month amid signs of an accelerating economic recovery.

Hungary raised its benchmark rate a quarter-point to 6 percent, the third consecutive increase, while the Polish central bank raised borrowing costs by a quarter-point to 3.75 percent from a record low to tame inflation expectations and strengthen the zloty.

The market may be “overreacting and pricing-in too many” rate increases, Ceska Sporitelna’s Lobotka said. The combination of stronger koruna, budget cuts, low demand-led inflation, the economy running below its full capacity and inflation drivers coming from abroad “isn’t exactly making it necessary for the central bank to hike immediately,” he said, forecasting the first increase in interest rates in the third quarter of 2011.

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