Wednesday, March 26, 2008

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.''

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