Wednesday, May 07, 2008

Czech National Bank Holds Interest Rates

The Czech National Bank left its benchmark interest rate unchanged for a second consecutive meeting today as it banks on the strong koruna and an economic slowdown to damp inflation. The Ceska Narodni Banka seven-member board kept its two-week repurchase rate at 3.75 percent.

The inflation rate, at 7.1 percent in March, has exceeded the central bank's 4 percent ceiling since November. Still, policy makers, who doubled borrowing costs over the past 2 1/2 years, are reluctant to lift rates further as the strong koruna and a global economic slowdown threaten to weigh on local exporters and stifle economic growth more than anticipated.

The Czech currency's strengthening of 12 percent against the euro in the past 12 months may contain inflation by holding down import price growth and weigh on economic growth. The koruna was trading at 25.138 against the euro as of 2:34 p.m. in Prague, compared with 25.207 yesterday.

Rate setters consider the current inflation spike a one-time event, triggered by factors outside of the central bank's reach. They are concerned about the second-round effects of unexpectedly fast price growth, including accelerated pay increases after unemployment slid to an 11-year low.

In its last staff prognosis from February, the central bank predicted the inflation rate to drop to 3.4 percent in the first quarter of 2009 and 2.3 percent between July and September 2009.

The bank's target is 3 percent plus or minus a percentage point. When setting rates, policy makers focus on 12-18 months ahead, when their current decisions should have worked through the economy.

The main Czech lending rate is a still a quarter percentage point lower than the ECB's benchmark rate. Any eventual rate increase could spur additional gains to the koruna, which already is the world's second best-performing currency against the euro and dollar in the past year.

The central bank three months ago forecast the economy will expand 4.1 percent this year and 4.6 percent in 2009, compared with a record growth rate of 6.5 percent last year.

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