Czech National Bank: No Rate Change But More Dovish Bias

March 25, 2010

The two-week repo rate was left at 1.0% by a 4-2 vote.  Unlike a unanimous decision on February 4 to keep policy stable, today’s meeting saw two policymakers dissent in favor of a 25-basis point cut because of a more benign inflation prognosis that envisages a sub-target CPI until March 2011.  Consumer prices rose only 0.6% in the year to February, down from 2.0% in the previous twelve months.  Unemployment of 9.9% is at a 71-month high, jobs are 2.1% lower than a year ago, and retail sales show an on-year decline of 5.0%.  GDP rose 3.0% annualized last quarter but was still 3.1% lower than in 4Q08.  Officials expect GDP to climb just 1.3% this calendar year after slumping 4.1% in 2009, so there’s plenty of resource slack to keep inflation low.  Moreover, the koruna has appreciated some 4% against the euro since end-2009 and is around 10% stronger against the dollar than a year ago, thus depressing import prices.  As in the case of South Africa, where rates were cut today (see prior post), recent currency movements influenced central bank thinking in a dovish direction.  Like the bank’s statement in February, Today’s assigns a baseline inflation forecast that’s near the 2% target in the medium term, but risks to that view are now skewed to the downside.

From 3.75% prior to the Great Recession, the Czech National Bank implemented 7 rate cuts totaling 275 basis points, starting with a reduction of 25 bps in August 2008 and followed by reductions of 75 bps in November, 50 bps in December and February 2009, and 25 bps each after the ensuing May, August and December meetings.  Minutes from today’s meeting will be published on April 2nd

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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