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Czechs Keep Zero Rates as Policy Moves to Currency Sales

Czechs to Keep Zero Rates as Debate Shifts to Koruna Sales
After three rate cuts this year, the Czech central bank is in uncharted territory as weakening domestic demand tames inflation and pushed the economy into its second recession since 2009. Photographer: Vladimir Weiss/Bloomberg

Dec. 19 (Bloomberg) -- Czech central bankers kept the main interest rate at effectively zero as the second recession since 2009 sparked debate on whether to weaken the koruna to further ease monetary conditions.

The Ceska Narodni Banka held the two-week repurchase rate at 0.05 percent, almost three-quarters of a percentage point less than the euro-area benchmark, at a board meeting today, in line with forecasts by all 16 analysts in a Bloomberg survey.

After three rate cuts this year, the Czech central bank is in uncharted territory as weakening domestic demand tames inflation and pushed the economy into its second recession since 2009. Several policy makers, including Governor Miroslav Singer, have said the bank may sell the koruna to further relax conditions as the slump risks stretching into the longest ever.

“The koruna exchange rate, which is weaker than assumed in the forecast, for now is partly offsetting domestic anti-inflationary developments,” Singer said at a press conference in Prague after the announcement. “Although the exchange rate is helping us to some extent at the moment, we still perceive the risks as slightly anti-inflationary.”

The koruna reversed a retreat to a four-week low after Singer’s comments, trading less than 0.1 percent weaker at 25.197 per euro by 3:46 p.m. in Prague. It had retreated as much as 0.5 percent to 25.310, its weakest intraday level since Nov. 21, before the governor spoke.

The koruna has lost 2.6 percent against the euro since Sept. 17, one day before Singer first said the bank may use sales of the currency to ease monetary conditions. That’s the sixth-worst performance among major emerging-market currencies tracked by Bloomberg in the period.

Steady Rates

Most Czech central bankers agree the main interest rate should be kept at the current level until inflation risks rise significantly, according to minutes from the November meeting.

Monetary authorities in central Europe are easing policy to alleviate the impact of the sovereign-debt crisis in the euro area, the region’s main trading partner. Hungary cut its main rate to 5.75 percent yesterday, the fifth reduction in as many months, while Poland’s central bank Governor Marek Belka on Dec. 11 called for more interest-rate cuts from 4.25 percent.

Czech monetary policy may need to be more relaxed in 2013 to ensure that inflation develops as the central bank forecasts, according to Singer.

“The forecast assumes more relaxed monetary conditions at around the middle of next year,” Singer said today. “The data mix we are getting shows slight anti-inflationary risks vis-a-vis the forecast, but I wouldn’t make any strong statements about a shift in the timing that’s assumed in the forecast.”

Weak Economy

The economy is suffering from weak domestic demand as households and businesses cut spending due to government austerity programs and the euro-area debt crisis. Output shrank for a third three-month period from July to September, one quarter short of matching the longest decline ever.

Gross domestic product fell a quarterly 0.3 percent from April-June, compared with a revised 0.4 percent decline in the previous three months, the Statistics Office in Prague said Dec. 7. GDP contracted 1.3 percent from a year earlier, also a third straight decline and the worst reading since 2009.

Inflation eased to 2.7 percent in November, the slowest this year, from 3.4 percent in the previous month. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 1.5 percent.

Price Growth

Inflation next year will hover “slightly above” the 2 percent target, the central bank said in a quarterly update of its forecasts published on Nov. 1. It sees monetary-policy inflation between 1 percent and 2 percent next year.

Selling the currency is the preferred next policy tool, after exhausting the room for cutting interest rates, because of the “proven and quick reaction of the economy to depreciation of the koruna exchange rate,” Tomas Holub, the head of the central bank’s monetary and statistics department, wrote in a column for the Euro magazine posted on the central bank’s website on Dec. 3.

“Nothing was said about potential interventions,” Martin Lobotka, an economist at Ceska Sporitelna AS in Prague, wrote in e-mailed comments after the rate announcement. “This may suggest the CNB is OK with the koruna being where it is now and, if it stays there, the bank won’t do anything.”

To contact the reporter on this story: Peter Laca in Prague at

To contact the editor responsible for this story: Balazs Penz at

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