Czech interest rates below those of the euro region have failed to revive lending, suggesting the central bank may need to pursue an alternative strategy to lift the economy out of recession.
The CHART OF THE DAY shows Czech loan growth slowed even as policy makers cut the benchmark two-week rate to a record low 0.25 percent. The Ceska Narodni Banka will hold rates at its next policy meeting on Nov. 1, according to 15 of 20 analysts surveyed by Bloomberg. The European Central Bank’s benchmark rate is 0.75 percent.
“The Czech economy desperately needs monetary easing and since interest rates are already close to zero, it’s clear that the central bank needs to use other instruments,” said Lars Christensen, chief emerging-market analyst at Danske Bank A/S in Copenhagen. “The most obvious and simplest way to ease monetary policy in the present situation would be to use the foreign-exchange channel.”
The Czech economy, which has contracted for three straight quarters, is suffering from weak domestic demand after the government cut investments and raised taxes to reduce the budget deficit. The central bank’s board agreed to weaken the koruna should it need to ease policy beyond what another rate cut would achieve, Governor Miroslav Singer said on Sept. 27.
Czech export growth in the second quarter was the slowest since the end of 2009. Sales abroad account for three-quarters of gross domestic product, with 80 percent of exports going the European Union.