Czech Central Bank to Hold Rates as Crisis Threatens Growth

The Czech central bank will probably refrain from changing borrowing costs for a 12th meeting as it evaluates the impact of the euro area’s debt crisis and the possible need to lower interest rates to support the economy.

The Ceska Narodni Banka will leave the benchmark two-week repurchase rate at a record-low 0.75 percent today, half the European Central Bank’s main rate, according to all 20 analysts in a Bloomberg survey. The bank will announce its decision at 1 p.m. in Prague and hold a news conference at 2:30 p.m.

An economic slowdown in the euro area, the main market for Czech exports, will hamper growth this year and next, the Finance Ministry said on Oct. 31. A worsening of the currency bloc’s sovereign-debt crisis may lead to a rate cut if it intensifies downside inflation risks, Governor Miroslav Singer said in September.

“The threat of the debt crisis escalating, a contagion to the real economy through the export channel and a credit crunch in Western Europe are the main anti-inflationary factors,” Marek Drimal, a Komercni Banka AS analyst, wrote in a report before the rate decision. He expects no rate change throughout 2012. “Should demand for Czech goods collapse, we might witness another contraction in the economy.”

Balancing Concerns

Central banks in the European Union’s eastern members are weighing faltering growth prospects against weaker currencies after tightening policy earlier this year. Monetary authorities in Poland left the seven-day rate unchanged for a third meeting at 4.5 percent on Oct. 6, while Hungary kept its benchmark rate steady at 6 percent for a ninth month on Oct. 25. Romania bucked the trend yesterday, cutting the EU’s highest rate by a quarter-point to 6 percent.

The ask price for forward-rate agreements locking in the three-month interest rate in six months was 1.08 percent today, down from 1.1 percent yesterday and compared with 1.36 percent when the central bank published its latest forecast on Aug. 4. The three-month Prague Interbank Offered Rate was 1.15 percent.

The Czech central bank will also publish an update of its economic forecasts today, including an outlook for market interest rates. The last update on Aug. 4 saw borrowing costs rising from about the end of the year, though “several board members” said the official rate may move in any direction because of the uncertainty stemming from the sovereign-debt crisis, according to minutes from the last meeting on Sept. 22.

The central bank has maintained record-low borrowing costs as the government’s budget cuts constrained domestic demand and tamed inflation. The bank, whose mandate is price stability, cut the main rate by 3 percentage points during the global economic crisis that sparked the worst Czech recession since the end of communism in 1989.

No Impact

Interest rates shouldn’t change until the end of the first quarter and a further reduction in the main rate “might not have a major impact on commercial interest rates,” board member Kamil Janacek said in an Oct. 21 interview.

September inflation was 1.8 percent, below the central bank’s 2 percent target for a fourth month and 0.4 percentage points below the bank’s forecast, mainly due to lower food prices.

A Czech economic recovery is dependent on EU demand for its products, which include Skoda Auto AS vehicles and car parts. The bloc purchases about 80 percent of Czech exports, with Germany alone accounting for a third.

Czech growth eased in the second quarter for the first time since a 2009 recession as a slowdown in the EU dented demand for exports and government austerity measures curbed domestic spending. Gross domestic product rose 2.2 percent in the second quarter from a year earlier, after expanding 2.8 percent in the first three months.

The Finance Ministry cut its 2012 GDP growth forecast to 1 percent from 2.5 percent and Finance Minister Miroslav Kalousek said the new outlook carried downside risks.

A weakening of the Czech koruna is easing conditions for Czech exporters as it makes their goods cheaper abroad. The currency has lost 3.6 percent to the euro in the past three months, according to data compiled by Bloomberg, and is down 0.6 percent since the start of the year.

“We see the Czech National Bank relying on continued koruna weakness from here to help weaken monetary conditions,” analysts at UniCredit SpA said in a report.

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