Czech Interest Rates

The Czech central bank looks poised to raise its benchmark interest rate by a quarter-point to the highest in almost five years in a bid to curb accelerating inflation. Bloomberg today:

The bank's seven-member board will lift the 14-day repurchase rate, now the lowest in the European Union, to 3 percent today in the second increase this year, according to 21 of 23 economists in a Bloomberg survey. Two forecast no change. The Prague-based central bank typically announces its decision around noon.

Policy makers say they're concerned inflation, which picked up to 2.5 percent in June, is nearing the bank's 3 percent target faster than predicted after the koruna declined and wage growth and falling unemployment triggered consumer spending on homes, cars and household goods. Price growth must be kept at bay to meet terms for adopting the euro in the next decade.

The koruna was trading at 28.138 to the euro as of 9:41 a.m., compared with 28.147 yesterday. The currency has declined 2.3 percent against the euro this year, following a 5.5 percent appreciation in 2006. A strong koruna keeps down import prices, helping control inflation.

Economists said Czech policy makers are left with little choice today because the economy is growing at more than 6 percent for a third year, fueled by household demand. They're split on whether the increase will be the last this year.



Retail sales rose an annual 7 percent in May, following an 8.1 percent increase in April and a record 10.5 percent in March. Producer prices rose at the fastest pace in five months in June, bringing the annual rate to 4.6 percent, the highest in more than two years.

A record low jobless rate and a record number of vacancies have raised concern of a shortage of workers and rising wages. Adjusted for inflation, wages grew 6.2 percent in the first quarter, the most in three years.

The labor market will be ``crucial'' for inflation, central bank Deputy Governor Ludek Niedermayer said on July 12.

Bank Forecast

Economists expect the bank to raised its quarterly inflation forecast today, after predicting in April an annual rate of between 3.2 percent and 4.2 percent in December. The central bank targets inflation at 3 percent plus or minus 1 percentage point.

The April inflation rate of 2.5 percent was a half-point higher than the central bank's prediction for that month.

Annual inflation may approach 4 percent later this year and accelerate to as fast as 5 percent next year if the government pushes through changes to the tax system to be introduced in 2008, economists said.

``The last time we saw such high inflation was for several months in 2001 and before that in 1998,'' said Miroslav Plojhar, an economist at JPMorgan in London.