Czech five-year bond yields tumbled the most ever and the koruna slid to its weakest in almost three months after the central bank unexpectedly cut interest rates.
The yield on 2017 koruna debt slumped 22 basis points, or 0.22 percentage point, to 0.78 percent, the biggest drop and the lowest level since Bloomberg began tracking the generic index in 1997. The koruna depreciated 0.3 percent to 25.165 per euro by 4:48 p.m. in Prague, the worst performance among major emerging-market peers, after earlier touching 25.235, its weakest since Aug. 13.
The Czech National Bank slashed its key two-week repurchase rate to a record 0.05 percent today from 0.25 percent. Fifteen of 22 analysts surveyed by Bloomberg expected no change and seven predicted a cut. Data published yesterday showed a gauge of manufacturing fell to a three-year low and the government lowered its economic forecasts for this year and next.
“They did more than we expected,” said Dalimil Vyskovsky, chief fixed-income trader at Komercni Banka AS in Prague. The unit of Societe Generale SA forecast a cut to 0.1 percent, he said by phone. “With rates this low for a prolonged period, shorter yields may keep lower too. But we are near the bottom.”
The CNB seeks to prevent inflation from slowing to below the 2 percent target as household and government spending cuts helped fuel a second recession in three years. Gross domestic product may shrink 1 percent this year and grow 0.7 percent next year, the government said yesterday, after earlier forecasts for a 0.5 percent drop and 1 percent expansion, respectively.
Czech policy makers are considering using other tools to relax conditions after lowering the benchmark from 0.75 percent this year to near the zero level seen in Japan and Switzerland. Steps to weaken the koruna will be the next move should further monetary easing be needed, Governor Miroslav Singer said today.
“The CNB has taken a strong position, making it clear that the koruna now doesn’t have much room for gains,” David Sykora, chief currency trader at CSOB AS in Prague, said by phone today. “Economic results may send the koruna somewhere toward 26 -- a freebie for the central bank.”
Czech bonds have rallied this year, sending the five-year yield down 170 basis points, even as Prime Minister Petr Necas struggles to win backing for tax increases, designed to help cut the budget deficit. Necas seeks re-election as Civic Democrat leader on Nov. 3-4 after a group of lawmakers from his party said they would vote against his austerity package.
The country’s debt has the highest credit rating in central and eastern Europe, on par with Estonia, and is the cheapest to insure with credit-default swaps. Improving perceptions of creditworthiness lowered the Czech five-year default swaps by 2.5 basis points today to 78, within one basis point of the lowest since June 2011 reached on Oct. 26.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Public debt accounts for 44 percent of GDP in the Czech Republic, below 55 percent in Poland, 79 percent in Hungary and an average of 92 percent for the euro area, European Commission estimates for 2012 show. Necas’s plans to limit indebtedness would enhance the country’s status of a “regional safe haven,” Moody’s Investors Service said in a report on Oct. 15.
The government won’t have any reason to remain in office if parliament rejects the tax plan, Finance Minister Miroslav Kalousek said on Oct. 28.
“The big question is what will happen if the government falls next week,” Komercni Banka’s Vyskovsky said. “That would be at least a short-term negative for bonds.”