A Surprise From the Czech Central Bank

December 16, 2009

By a narrow 4-3 vote, monetary officials in the Czech Republic voted to reduce the key two-week repo rate and the Lombard rate each by 25 basis points to 1.0% and 2.0%, respectively.  Most analysts were not anticipating a further ease in light of higher-than-expected November CPI results that swung the on-year inflation rate from minus 0.2% to +0.5%.  And a statement from the central bank attached a “slightly pro-inflationary” risk bias to the forecast that inflation will stay close to the target boundaries of 2-4% during the forecast horizon.  Despite a 3.1% annualized quarterly rise, real GDP in 3Q09 was 4.1% lower than a year earlier, and industrial production fell 7.3% in the year to October. Exports, imports, and jobs all still show significant on-year drops, and the jobless rate of 8.9% is elevated.

Coming into August 2008, the repo rate had been 3.75%.  It was reduced by 25 bps that month, 75 bps in November 2008, 50 bps in December, 50 bps in February, 25 bps in May and 25 bps to 1.25% in August.  One policymaker had wanted to cut rates again in September, and the number of dissenters at the November 2009 meeting rose to three.  This time the doves had the majority.  One risk of cutting rates to the ECB level is the potential for korona depreciation against the euro, which would create some upward inflationary pressure.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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