First Czech Interest Rate Cut Since December

May 6, 2010

The Czech National Bank two-week repo rate was sliced for the first time in five months by 25 basis points to 0.75%.  Many analysts thought the risk of Greek contagion would have deterred such a move.  The Czech budget and external deficits are running this year at 5-6% and around 2% of GDP, respectively.  Seven previous cuts in the repo rate had cumulated to 275 basis points from a prior high of 3.75%:  25 basis points in August 2008, 75 bps in November, and 50 bps in December followed in 2009 by reductions of 50 bps in February, 25 bps in May, 25 bps in August and 25 bps in December.  The other two Czech central bank rates moved into alignment with ECB levels.  The Lombard rate is also being reduced by 25 bps to 1.75%, while the discount rate remains at 0.25%.

A statement from officials revealed a split vote with two of six policymakers preferring no change.  At the previous meeting on March 25, two policymakers in a 4-2 decision had voted in favor of a cut of 25 bps.  Projected CPI inflation in the Czech Republic has been revised down for both 2010 and 2011.  Adjusted to exclude the distortion of higher indirect taxes, inflation is expected to be less than the 2.0% medium-term target but within the 1-3% surrounding range.  Czech unemployment of 9.7% is on a par with the United States and a shade less than in Euroland.  GDP is seen running at 1.5-2% this year and next.  Officials stressed that market interest rates probably would ease in 2010 and then firm gradually next year.  Like many East European currencies, the koruna is about 5% stronger against the euro than a year ago.

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



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