Czech National Bank Flags Likely Rate Cut in December

November 3, 2011

Policymakers did not immediately follow the ECB’s cue, leaving the CNB’s two-week repo rate at a record low of 0.75%.  Eight reduction from August 2008 through May 2010 slashed the key policy interest rate from 3.75% to its present level of 0.75%, where such has stayed now for a year and a half.  Today’s 6-1 vote include one dissent in favor of cutting the key rate to 0.5%, and new forecasts in today’s statement implies a likely 25-bp reduction at the December 21 meeting.

Two growth scenarios are laid out.  The most likely outcome shows Czech GDP expanding 2.2% next year and 2.7% in 2013.  Those projections are revised downward from 2.2% and 3.8%.  An alternative forecast embodies a recession in the euro area and puts Czech growth at 1.2% in 2012 and 2.3% in 2013.  The alternative scenario projects a weaker koruna against the euro than the baseline forecast, which constitutes an implicit easing of credit policy all other things being equal.  But officials do not accept that result.  So the alternative scenario pencils in somewhat higher interest rates than the baseline forecast, and the trajectory of CPI inflation is therefore the same under the two different sets of assumptions.

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



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