Czechs Refrain From Koruna Sales as Main Rate Unchanged

The Czech central bank rejected koruna sales endorsed by Governor Miroslav Singer for a second meeting as the economy shows signs it’s recovering from a record-long recession.

The Ceska Narodni Banka kept the benchmark interest rate at what it calls a “technical zero” of 0.05 percent today, almost half a point below the European Central Bank’s benchmark and matching the forecasts of all 15 analysts in a Bloomberg survey. Twelve of 14 economists in a separate poll said interventions wouldn’t be announced.

Rate setters are debating whether slowing inflation warrants the first koruna sales since 2002 after three rate cuts last year exhausted room for traditional monetary easing. The central bank is weighing the strength of an economic rebound after the country exited a 1 1/2-year recession. The chance of koruna sales remains high, Singer told reporters today.

“As for currency interventions, we voted again, didn’t start them, but we more or less agreed that the likelihood basically isn’t changing,” said Singer, who’s repeatedly spoken in favor of more policy easing this year. He didn’t disclose a breakdown of the ballot.

The koruna gained as much as 0.8 percent, the most in almost three months, after Singer’s comments, to trade 0.6 percent stronger at 25.708 as of 2:55 p.m. in Prague, according to data compiled by Bloomberg.

Deflation Risk

The currency, which has lost 2.5 percent to the euro this year, has moved to the center of policy deliberations because its depreciation would make imports more expensive and boost the competitiveness of exports, curbing deflation risks.

There are “slight” disinflationary risks to the central bank’s forecast, showing the need of “slightly looser monetary conditions,” Singer said today. “On the other hand, the first signs of a recovery are appearing.”

Industrial output and retail sales both beat economist predictions in July, advancing 2.1 percent and 4 percent from a year earlier. Gross domestic product rose 0.6 percent from the previous three months in the second quarter.

Eastern European policy makers are diverging as their economies show varying degrees of recovery. Hungary’s central bank cut its benchmark interest rate to a record low of 3.6 percent Sept. 24, while Poland kept its main rate at a record-low 2.5 percent Sept. 4 and promised to leave borrowing costs unchanged through at least year-end.

More Easing

More policy easing will be needed to bring inflation closer to the 2 percent target, Singer said in an August interview with Euromoney magazine, posted Sept. 18 on the central bank website, his last published comments before today’s meting.

Inflation unexpectedly slowed for a second month in August, reaching 1.3 percent from a year earlier after consumer prices rose 1.4 percent in July, the statistics office said Sept. 9.

Inflation relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.5 percent in August from 0.7 percent the previous month. It’s stayed below the central bank’s 1 percent to 3 percent tolerance band since February.

Economic conditions are preventing the central bank from further policy easing, namely intervention to weaken the koruna, according to William Jackson, an emerging-markets analyst at Capital Economics Ltd. in London.

“With the economic recovery still fragile, the policy board is likely to keep the threat of intervention on the table,” Jackson said by e-mail after Singer’s comments. “But barring a relapse in growth, we suspect that it won’t ultimately be adopted.”

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