Thursday, February 07, 2008

Czech Central Bank Raises Main Interest Rate

The Czech central bank raised its main interest rate for a fifth time since May today in a bid to bring the inflation rate down to its 3 percent target by next year. The rate-setting board lifted the two-week repurchase rate a quarter point to 3.75 percent at this year's first session.

The inflation rate climbed to 5.4 percent in December, the highest in more than six year, beating the central bank's prediction for 3.9 percent.

The koruna was trading at 25.623 per euro as of 2:14 p.m. in Prague, compared with 25.582 in yesterday's late trading.

The statistics office may say tomorrow the January inflation rate soared to a nine-year high of 6.5 percent, based on the median estimate of 15 economists. The central bank's October outlook, which will be revised today, put annual price growth at 4.4 percent to 5.8 percent in September and 3.1 percent to 4.5 percent in March 2009.

Czech borrowing rates, which are the highest in six years, are still the lowest in the European Union, trailing the European Central Bank's main lending rate of 4 percent. Futures trading shows investors are betting on the repo rate to peak at 4 percent by June, which would end a 2 1/2-year rate-rise series.

Demand for higher wages from employees who see their buying power eroded from accelerating inflation may thwart the expected drop in the rate back to the central bank's target of 3 percent, plus or minus a percentage point, even after the effect of one-time tax increases and jumping food and oil prices ebbs.

The koruna's almost 12 percent appreciation against the euro since July is helping tame inflation by slashing import prices and weighing on exports. In addition, the economy is seen to grow 4.7 percent this year, after 6.1 percent in 2007, led down by household spending, the Finance Ministry estimated on Jan. 31.

Starting this year, the central bank is reducing the number of monetary-policy sessions to eight from 12. It will also start publishing minutes showing how individual board members voted on rates and will present a non-binding path of future interest rates as suggested by its inflation prediction.

Today, the central bank also decided to increase the discount rate to 2.75 percent and boost the Lombard rate to 4.75 percent. All changes take effect tomorrow.

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