Czech Central Bank Keeps Interest Rates on Hold

The Czech koruna fell against the euro today following the decision by the Czech central bank to keep what are till the European Union's lowest interest rate on hold to try to restrict the ongoing rise in the currency. This is a very tricky game to play indeed, and the bank effectively bucked the trend among other the other EU10 central banks who have some sort of autonomy left over their monetary policy (Romania raised rates today, as did Poland, while we could say that in Slovakia - where they have incraesingly less monetary policy options left by the day as they make one last desperate effort to converge with the eurozone despite a sudden acceleration in inflation and GDP growth - the decision not to raise was effectively taken for them, since they cannot afford to enter EMS with an excessively high partity rate with the euro).

The Prague-based bank left the repurchase rate where it was,at 3.75 percent. The koruna has gained 8 percent against the euro in the past six months alone, ranking it as the world's best performer during the period of global financial turmoil.

The Czech currency fell as much as 0.8 percent following the news, down to 25.662 per euro and was at 25.502 by 5:22 p.m. in Prague, from 25.471 yesterday. It has now fallen 1.8 percent since the central bank said March 18 it will freeze the proceeds from state-asset sales.

Policy makers want to revive a 2002 accord whereby foreign- currency proceeds from the sales would be put in a special account to keep fund flows out of the market and limit demand for the koruna, Deputy Governor Mojmir Hampl said. Policy makers are concerned more rate increases, after eight in the past two and a half years, would push the koruna even higher, threatening to become completely counter productive.

``The bank board has consensually agreed that the decision- making is uneasy and risks of leaving the current rate trajectory are relatively high,'' central bank Deputy Governor Miroslav Singer said today. ``We perceive the situation as burdened with balanced but substantial risks in both directions.''

Czech Retail Sales January 2008

Czech retail sales grew at the slowest annual rate in four months in January as accelerating inflation curbed shoppers' purchasing power, supporting speculation that interest-rate increases may not continue. Sales rose 4.1 percent, compared with an annual increase of 5.4 percent in December, the Czech Statistical Office said today.




Retail sales, excluding cars and motor fuels, were up by 3.3 percent and were 4.9 percent higher when seasonally adjusted, led by clothing, furniture and electronics. Sales of cars and motor fuels grew 6 percent.

Consumer spending has eased back as inflation accelerated to 7.5 percent in January from 1.3 percent a year earlier. The central bank expects cooling household spending, the main driver of economic growth in the past two years, to restrain the Czech expansion back to a 4.1 percent GDP growth in 2008 from 6.5 percent 2007. If today's data give them some encouragement to believe they are succeeding then they may well leave the main interest rate at its current 3.75 percent. Certainly with an average inflation rate this year of over 6 percent and nominal wage increases of around 8 percent, real salaries may well increase by less than 2 percent following the 4.4 percent increase in real wages in 2007. So this would definitely be a move in the right direction if it can be sustained.

The koruna fell to 25.208 per euro by 10:47 a.m. in Prague, compared with 25.141 yesterday. The ask yield on the government benchmark bond maturing in 2018 rose 5 basis points to 4.59 percent.

Czech Producer Prices February 2008

According to the latest release from the Czech Statistics Office prices of agricultural and industrial producers were up in February by 0.7% and 0.1%, respectively over January, while prices of construction work and market services grew by 0.4% and 1.1%, respectively.

In comparison to February 2007, prices of agricultural and industrial producers increased by 27.1% and 5.6%, respectively; prices of construction work and market services were up by 4.5% and 3.4%, respectively. That is core industrial producer prices are now rising at a 5.6% annual rate.




Agricultural producer prices grew by 0.7% in total. Prices of crop products rose by 2.0% due to higher prices of cereals (+3.4%). Prices of potatoes, fruit and vegetables fell by 5.8%, 2.3% and 1.7%, respectively. Prices of animal products fell by 1.0%; lower were prices of milk (-0.2%), poultry (-1.6%) and pigs for slaughter (-3.6%). Higher prices were recorded for eggs (+0.9%).

Industrial producer prices rose by 0.1% (+1.9% in January). The growth of price level came mainly from higher prices in ‘basic metals and fabricated metal products’ (+0.6%), ‘machinery and equipment” (+0.9%) and “chemicals, chemical products and man-made fibres’ (+1.1%). Prices increased in 'food products, beverages and tobacco’ by 0.2%, of which the most marked increase was recorded for ‘animal and vegetable oil and fats’ by 6.7% and ‘prepared animal feed’ by 2.4%. On the other hand, prices dropped in ‘meat and meat products’ by 1.6% and ‘dairy products and ice cream’ by 1.4%. Prices decreased in ‘transport equipment’ by 0.9%, ‘coke, refined petroleum products' by 0.8% and in ‘rubber and plastic products’ by 0.6%.

Construction work prices rose by 0.4%, and so did prices of construction material input (+0.6%).

At the same time export prices decreased by 2.6% in January (following a 2.1% decrease in December) dropping for the third month in a row. The underlying reason for this improved performance is undoubtedly the appreciation of the koruna. The biggest price decreases were registered in ‘miscellaneous manufactured articles’ which were down by 5.2% (particularly articles of apparel and clothing accessories), ‘machinery and transport equipment’ down by 4.9% (especially general industrial machinery and equipment) and ‘chemicals and related products’ down by 3.8%. In contrast, the highest price increases were recorded for ‘food and live animals’ - up by 12.7% (mainly cereals and cereal preparations) - and ‘mineral fuels, lubricants and related materials’ - up by 18.0% (particularly coal, coke and briquettes and electric current).

Czech Inflation and Unemployment February 2008

Czech consumer prices rose by 0.3 percent in February, keeping annual inflation at the nine-year high of 7.5% which it reached in January, the statistical bureau said on today. Price growth was driven mainly by housing prices, including water and heating, and kept open the possibility that the central bank will raise interest rates once more in the next few months. A separate set of figures from the Labour Ministry showed unemployment fell to 5.9 percent in February from 6.1 percent in the previous month.




The data lacked the kind of negative surprise impact which shocked the market in January but this continuing high inflation may well prompt more monetary policy tightening. The central bank has raised the main repo rate by 200 basis points to 3.75 percent as the economy grwon at a tidy clip over the past three years.

The central bank has acknowledged inflation is still 0.6 percentage points above its fresh forecast, and has been struggling to try to anchor inflation expectations, suggesting that the current spike is largely a short-term deviation.


A major anti-inflationary factor has been the rise in the value of the koruna, which currently stands up some 11 percent year-on-year against the euro. It has been cooling off from the record 24.83 seen on March 4, and briefly dipped to 25.125 after the inflation data from 25.095 before but then firmed back to 25.033 by 1310 GMT.

There are various risks to the banks inflation forecast on both the supply and demand sides. One clear danger if that the rapid rise in some prices, even if only temporary, creates higher costs for businesses that may lead to rises in other prices as well as higher expectations for higher inflation among Czech consumers and companies. This risk may well prompt the Czech central bank to raise rates either this month or in the not too distant future.

On the supply side there are gowing pressures from labour shortages in some sectors. Separate unemployment data out today from the Ministry of Labour and Social Affairs showed the number of jobless fell to 5.9%, its third lowest level since 1998 in what is already tight labour market, further boosting the case for a rate hike.

In February the Czech employment offices registered a total of 355,033 job seekers. That is 9,511 less than at the end of January, and 99,704 less than in February 2007. The number of available job seekers (job seekers currently available for work) was 330,641. In the course of February, job offices registered a total of 40,002 first signings. That is 23,152 job seekers less than in January and 718 newly registered job seekers less than in February 2007. In February job offices registration was terminated by 49,513 job seekers. New jobs have been taken up by 31,735 persons.


In February 2008 the unemployment rate was 5.9 % (January 2008: 6.1 %, February 2007: 7.7 %). The unemployment rate was higher than average in 35 districts, the highest being in Most (14.9 %), Karviná (13.1 %), Znojmo and Jeseník both (11.9 %) and Teplice (11.8 %). The lowest unemployment rate was in the districts of Praha–východ (1.7 %), Praha–západ (1.9 %), Praha and Mladá Boleslav (both 2.2 %). The unemployment rate for women was 7.2 % and the unemployment rate for men was 5.0 %.

Czech Wages and Salaries Q4 2007

Czech real wage growth slowed the most in two years in the last quarter of 2007 as inflation accelerated. The average monthly paycheck rose 1.9 percent when adjusted for inflation, compared with growth of a revised 4.9 percent for the preceding three-month period, the Prague-based statistical office said today. The average gross monthly salary advanced 6.8 percent to 23,435 koruna ($1,435). For whole year 2007, real wages advanced 4.4 percent, the most in four years.



The average inflation rate rose to 4.8 percent in the fourth quarter from 2.5 percent in the third, eliminating most of the nominal wage increase negotiated by unions and their employers. Policy makers at the central bank have said the inflation surge is only temporary and have urged against any reopening of wage talks in an attempt to prevent the inflation rate from rising.



In the private sector the monthly paycheck was 6.7 percent higher at 23,484 koruna. When adjusted for price growth in during the year, wages grew 1.8 percent, the office said.

State-employee salaries grew 7.1 percent in October through December from a year earlier to 23,259 koruna, translating into a 2.2 percent real advance.

The central bank indicated last month it may begin to bring down what are still the European Union's lowest rates as early as later this year, citing the strong koruna, faltering economic growth and the fading effect of cost and administrative shocks on inflation.

At the same time, policy makers have said they are ready to resume lifting borrowing costs to prevent inflation and a scarce labor force from sparking excessive wage growth.

Offering us one possible indicator of what may be to come Toyota Peugeot Citroen Automobile, a Czech car venture formed by automakers Toyota Motor Corp. and PSA Peugeot Citroen, have said this week that wages will increase by 7 percent with effect from from April 1.

Czech January Trade Surplus

The Czech Republic posted a substantial January trade surplus following on the back of very healthy export growth, suggesting that manufacturers are still managing to weather the effect of the koruna's eight-month rally.




The 12.2 billion koruna ($748 million) surplus followed a revised 3.3 billion-koruna gap in December and a 9.8 billion- koruna positive balance in January 2007.

The koruna has advanced 15 percent against the euro since July, making it the world's best performer over the last half year. The strong currency puts pressure on exporters' revenue or makes their goods less competitive. The German economy, which is the destination for one-third of Czech exports, is expected to slow in 2008, with economic growth being forecast by the German government to reduce to 1.6 percent from 2.5 percent in 2007.

Exports in January rose 11 percent year on year and advanced to 210.1 billion koruna while imports amounted to 197.9 billion koruna, up 10.3 percent from a year ago.




The Czech Republic's 2007 trade surplus totaled a revised record 85 billion koruna, a third straight full-year surplus.

Czech GDP Q4 2007 Detailed Report

The Czech economy grew in the fourth quarter of 2007 at the fastest pace in almost two years on increased demand for health care and higher public spending on construction works according to the final report from the statistics office which is out today. Gross domestic product expanded year on year by 6.6 percent, which compares with the preliminary estimate of 6.9 percent reported on Feb. 15 and a revised 6.3 percent for the third quarter.



The economy grew by a record 6.5 percent in whole year 2007.



The government raised indirect taxes and imposed fees to discourage people from overusing public health care. That triggered higher spending on items such as drugs in late 2007, more than outweighing the effect of surging inflation on household expenses. This year's growth will slacken to between 4 percent and 5 percent, according to the official forecast.

The central bank predicts GDP will grow 4.1 percent in 2008 and the inflation rate is projected to pick up to 6.3 percent from 2.8 percent.

Consumer spending, which was the dominant driver growth for a consecutive second year, rose by 4 percent in constant price terms in Q4 when compared with Q4 2007, the slowest pace in two years. On the other hand, government expenditure was up 3.1 percent in the October- December period, the first increase in real spending in three quarters.

One-time factors ``predominantly applied to increased performance of the health industry, which resulted in higher expenditures of health insurance companies, and more intensive repair of road network with the impact on final government consumption expenditures,'' the office said. Without these effects they estimated growth would have been around 6 percent.

Gross fixed investment growth accelerated to an annual 8 percent in real terms and 9.8 percent in nominal ones, adding 2 percent to the overall GDP growth.

Exports of goods and services climbed at an annual rate of 12.5 percent when adjusted for price growth, more than a 10.2 percent increase in imports, as Czech manufacturers continued to benefit from rising demand in other EU nations, and in particular in Germany and Slovakia. External trade accounted for 2 percent of the GDP increase.