A Closer Vote on Czech Central Bank Rate

February 3, 2011

Monetary officials at the Czech National Bank kept the two-week repo rate steady at 0.75%, which had been the universally expected outcome, and released a statement that does not imply a tightening before late 2011.  However, the vote for unchanged policy was razor-thin at 4-3, with three dissents in favor a rate hike of 25 basis points.  Previous votes had gone 6-1 in December, 5-1 in November and 6-1 in September.  Moreover, officials revised projected growth up 0.4 percentage points (ppts) to 1.6% this year and up 0.5 ppts to 3.0% in 2012.  Projected inflation also was revised upward to 1.5% from 1.3% for this year and to 2.0% from 1.8% in 2012.  While price risks are deemed balanced, the forecast revisions and the persistence of world commodity price pressures suggest that a first rate hike may occur before midyear rather than in 4Q11 or late in 3Q11.  The decision will depend in part on the koruna.  If expectations of a Czech hike sooner than an ECB rate hike deepen, the koruna may appreciate, and that could forestall the onset of tightening.

The 0.75% key interest rate was last cut in May 2010, and that was the only change made last year.  There were four reductions totaling 125 bps in 2009 and three adding up to 150 bps from a peak of 3.75% implemented between August and December of 2008.  The central bank’s other rates were not changed.  The deposit rate has been 0.25% since August 2009, and the marginal lending rate has been at 1.75% since May 2010.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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