Wednesday, December 19, 2007

Czech National Bank Leaves Interest Rates Unchanged

The Czech National Bank left its benchmark interest rate unchanged today as risks to its inflation forecast were judged to remain ``roughly balanced.'' Monetary Policy Board members voted 5-2 to keep the two-week repurchase rate at 3.5 percent, following an increase last month, central bank Governor Zdenek Tuma informed a crowded press conference in Prague today. Two policy makers voted to lift the rate to 3.75 percent.

The Czech Republic's inflation rate reached a six-year high of 5 percent in November, breaching the upper end of the central bank's target range as well as its 3.9 percent forecast for that month. The effect on price growth may be countered by the koruna's 10 percent gain against the euro since July and the possibility of an economic slowdown in the euro-sharing countries.

The board is still ``convinced that faster-than-expected inflation is caused by one-time influences,'' Tuma said. Also, ``there's an impact of the koruna appreciation, with the stronger exchange rate pushing down import prices.''

The currency gains help combat inflation by cutting the price of imports but it also restricts growth by limiting export growth since it makes Czech goods more expensive abroad. The koruna reached a record high on Dec. 10, advancing 5.2 percent against the euro and 14.9 percent against the dollar so far this year.

While the board assessed risks to inflation as ``significant'' in both directions, Tuma said he personally thinks risks are skewed to the upside. That makes a rate increase ``more likely'' than a cut as the next move, he said.

Still, ``should the koruna keep appreciating at a similar pace -- even though I don't find it likely -- it is possible to imagine a different monetary policy reaction,'' Tuma said. He said last month it is unclear whether the next move will be an increase or cut.

Inflationary pressures are mounting in the economy, which is heading for growth of more than 6 percent for a third year. Labor unions may become more successful in seeking higher wages after the unemployment rate reached a record-low of 5.6 percent in November.

Inflation is accelerating much faster than expected, which may drive January's rate to between 5 percent and 6 percent, Tuma said. Still, price growth is spurred by indirect tax increases, rising utility costs and food - factors that are beyond the central bank's reach, and the impact of these factors should fade away soon, Tuma said.

Inflation is being capped by the stronger-than-anticipated koruna and an outlook that growth in the euro-area economy may decelerate more than predicted, the central bank said.

The October ``forecast's main scenario continues to count on a gradual increase in interest rates to ward off a spillover of an inflationary shock to inflation expectations,'' he said. ``A higher risk of the spill-over'' could ``make it problematic to approach our target for 2008 and 2009, let alone for 2010.''

Food costs in the past two months may already have reflected the planned Jan. 1 increase in one of the value-added tax rates, a higher excise tax on cigarettes and introduction of an environmental tax, which could lead to a smaller-than- forecast pickup of consumer prices in January, Tuma said.

Central bankers may raise borrowing costs as early as at their next meeting on Feb 7, but meanwhile Czech borrowing costs remain the lowest among the European Union countries even after four increases this year.

The central bank has also decided to cut the number of its monetary policy meetings to eight from 12, starting next year, with the first session scheduled in February. It will also begin releasing individual votes by the board members and its outlook for rates.

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