Faltering Economy Boosts Case for Negative Czech Interest Rate

  • GDP unexpectedly drops on quarter amid industrial outages
  • Prospect of additional stimulus boosting demand for bonds

The Czech economy unexpectedly faltered in the fourth quarter, denting one of Europe’s fastest output expansion rates and adding to the central bank’s case for imposing negative interest rates.

Gross domestic product for October to December shrank 0.1 percent compared with the previous three months, ending six quarters of expansion as unplanned shutdowns at energy and chemical companies curbed output, according to a preliminary estimate from the Czech Statistics Office on Tuesday. Annual growth slowed to 3.9 percent, undershooting all 15 analyst estimates in a Bloomberg survey.

The figures add credence to the Czech National Bank’s recent warnings that the economy may need additional stimulus in the form of negative interest rates if growth fails to lift inflation toward the bank’s 2 percent target. Policy makers in Prague on Feb. 4 delayed the exit from their regime of limiting koruna gains until 2017 and said they were debating a potential rate cut to counter the effects of cheap commodities and euro-area quantitative easing.

Underlying Picture

“The fall in Czech GDP between the third and fourth quarters will take some of the gloss off emerging Europe’s best performing economy,” said William Jackson, a Capital Economics Ltd. analyst in London. “The underlying picture is still strong, but at the margin these data increase the likelihood that the CNB may ease monetary conditions further by introducing negative interest rates.”

The prospect of fresh stimulus has helped boost demand for Czech government bonds this month, with maturities of up to six years now trading at sub-zero yields. Forward-rate agreements show investor expectations that the central bank’s 0.05 percent benchmark interest rate may drop by about 20 basis points within six months from now.

The fourth-quarter slowdown was mainly caused by “extraordinary events” at energy and chemical companies, the statistics office said without providing further details. A profitable steam-cracker unit at Unipetrol AS, the country’s sole oil refiner, was practically destroyed in an August fire that put it out of operation for about a year. CEZ AS, the largest Czech electricity producer, grappled with unplanned outages at its Dukovany nuclear power plant.

In addition to the outages, the Czech economy is also being affected by a December slowdown of industrial production across Europe, Pavel Sobisek, the chief economist at the Prague-based unit of UniCredit SpA, said by e-mail.

The koruna has been trading just above the central bank’s limit on its appreciation around 27 per euro for more than three months. The exchange rate was 27.03 koruna to the euro as of 1:50 p.m. in Prague.

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