First Czech Rate Cut in 25 Months

June 28, 2012

By a narrow 4-3 split vote, the Policy Board of the Czech National Bank voted to cut the two-week repo rate to 0.50% from 0.75% and the Czech Lombard Rate to 1.50% from 1.75%.  The decision was expected.  A released statement expects consumer price inflation to remain above the 1-3% target range until next year and voices concern about the inflationary impact of the koruna’s 17% decline against the dollar over the past year.  However, core inflation is running well below the VAT-buoyed path of total inflation, and both are projected to lie slightly under 2.0% in 2013. Price concerns in the view of the four-person policymaker majority are overshadowed by the weakness of the Czech economy, which contracted in the first quarter by 3.1% at an annualized rate and by 0.4% from the first quarter of 2011.  GDP has fallen in three straight quarters, leaving no doubt that the Czech economy is experiencing a recession.  Officials expect GDP to stagnate in 2012 as a whole. 

The statement notes the low level of other central bank rates.  Today’s easing move conceivably was influenced by a perceived possibility (probability?) that the European Central Bank’s 1.0% refinancing rate and 0.25% deposit rate may be sliced next week.  Today’s action was the ninth rate cut of an easing cycle dating back to an initial 25-basis point move in August 2008.  That cut was followed by reductions of 75 bps in November 2008, 50 bps each in December 2008 and February 2009, and 25 bps in May, August and December 2009, May 2010, and today.  Altogether, the two-week Czech repo rate has been lowered by a cumulative 325 basis points from a prior cyclical peak of 3.75%.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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