Czech Central Bank Keeps Interest Rates On Hold

Well, it seems we now have a rather fascinating situation on our hands, since raising interest rates appears to have just gone out of fashion. Not that the decision of the Czech Central bank to hold interest rates steady today should have come as any great surprise, with oil prices dropping back and the Czech economy visibly slowing (not to mention the fact that Germany - probably the CRs largest single customer - is now sliding into a full blown recession), but what is so impressive about events this week is the way almost all the global central banks are now speaking with one, almost monotonous voice, on the back of the latest bout of financial turmoil in the United States: no rate rises fot the time being.

And thus it was today with the Ceska Narodni Banka whose board voted 4-2 to leave the two-week repurchase rate at 3.5 percent, following in the footsteps of the Polish and Romanian national banks who have also this week left their benchmark interest rates on hold.



Indeed far from raising, the main consideration was whether or not to lower rates again (following last months quarter point reduction), and during the meeting, two board members argued in favour of cutting to 3.25 percent immediately. Following the meeting Governor Zdenek Tuma reiterated that the bank's August forecast assumes further rate cuts:

``In the end, the opinion to hold won out not so much because the fundamental arguments for lowering were doubted, but mostly, precisely because of the respect for the large uncertainties and volatility in a number of factors in recent weeks,''

In part the justification for holding (and even cutting) rates is that inflation is clearly on the wane. The Czech inflation rate fell in August to the lowest so far this year as costs of food and fuel declined, raising the chances that price growth will slow to the central bank's target in early 2009. The annual rate dropped to 6.5 percent from July's 6.9 percent, according to data from the national statistics office earlier this month.



The koruna has now fallen back 3 percent against the euro since the central bank lowered its benchmark rate a quarter of a point on Aug. 7, turning the currency from one of the best performing to the third-worst performer among the 26 emerging market economies in the MSCI index.

Slowing Industrial Output

Czech indutrial output fell in July, by 0.7% on a seasonally and working day adjusted basis when compared with output in May. On an annual basis production was up by 2.2%, but when allowance is made for the 3 extra working days in July 2008 output was only up by 0.6%.



Looking at the above chart we should remember that due to the early timing of easter this year (in March) data everywhere have been a complete hodge podge. If we assume that the March/April reading need averaging out, what we find is that the rate of increase in Czech industrial output has been slowing steadily since last February. This picture is further confirmed by the seasonally adjusted output index, which clearly peaked in February, lurched down in March, rebounded in April and has since steadily headed south. In part this is due to slowing export activity and consumption in Germany, and in part it is due to the high krona, but whichever way you look at it things are slowing significantly.

Construction Output Also Slowing

In July seasonally adjusted total construction output at constant prices was up by 1.1%, compared with June. In comparison to July 2007, output at constant prices grew by 6.9%. The planning and building control authorities granted 11 055 building permits, i.e. 13.5% more year-on-year than in July 2007. The approximate value of authorised constructions increased by 16.2% year-on-year at non inflation adjusted prices and reached CZK 35.0 billion.



However when adujsted for working days total output rose by 1.8% (July 2008 had three working days more). The fastest growth was recorded in civil engineering, in the areas of new construction, reconstruction and modernisation as well as repair and maintenance. Civil engineering is of course recepient of most of the resources from EU structural funds going to the construction industry.

What we can see from the above monthly chart is that construction activity has gone in waves. We can also see that the latest wave ground to a halt during the spring of 2007. As we can see from the annual index below, construction activity has been rising steadily since 2000. It now remains to be seen for how much longer this sort of pace can be sustained.

Czech Retail Sales Slow Further in July

Czech retail sales growth slowed further in July, providing more evidence of the steady deceleration in the economy. In fact sales continued to rise year on year simply because there were 3 more working days in July 2008 than in July 2007.



Seasonally adjusted retail sales (excepting the automotive segment) were down by 0.6%month-on-month at constant prices in July. The year-on-year increase was 1.0% (without seasonal and wd adjustment they increased by 3.4%). The biggest contribution to the growth of sales came from the sale of books, newspapers and stationery, other retail sale in specialised stores and sales of furniture, lighting equipment and household articles, electrical appliances, radio and television goods, hardware, paints and glass in specialized stores.

In the automotive segment, seasonally adjusted sales at constant prices were down by 3.9% m-o-m and down by 2.2% y-o-y. Not seasonally adjusted sales grew by 4.0% year on year. Seasonally adjusted sales in hotels and restaurants dropped by 0.6% m-o-m and not seasonally adjusted sales decreased by 3.0% y-o-y. That is, tourism and services generally have been having a hard time of it.

Czech Export Growth Remains Lacklustre In July While Imports Fall

Exports from the Czech Republicc roseat  an annual 3.2 percent in July  - reaching  204.1 billion koruna - compared with a 1.7 percent increase in the previous month. Imports totaled 196.8 billion koruna, and were down 0.9 percent on  the year after a 1.1 percent drop in June. The fall in imports is a pretty clear reflection of the slowdown in internal demand, although ironically this will initially be reflected in a slight upward movement in GDP as the net external trade contribution rises slightly.



The export performance was all the weaker taking into account the fact that there were three more working days in July compared with the same month last year. The position hasn't been helped by a dramatic decline in European car sales.German car registrations fell an unadjusted 10.4 percent in August, (there were  two fewer working days), and this was  the third monthly decline this year.  

Elsewhere things were much worse. In Ireland, new sales continued downwards in August, with  August monthly sales figures down by 41.6 per cent on last year. Spanish car sales fell by 41.3 per cent in August, their sharpest decline this year. Data issued by Spanish industry group Anfac showed a fall in showroom traffic across regions as the economy moved close to a recession. Italy's sales fell for the eighth month in a row, down 26.42 percent to 77,156 units, the biggest monthly drop this year, according to government figures. For the first eight months, sales totalled 1,531,598 units, down 12.04 percent.  Car sales in France did better, falling by  7.1 per cent  year on year uncorrected, and rising slightly at 2.2 per cent when adjusted for differences in working days.

In general terms the Czech Republic is beginning to feel the twin  impact of slowing growth in the 15-member euro region - the country's main trading partner - and the appreciation of the koruna, which rose to a record of 22.877 on July 21, and has further weighed on exporters by making Czech goods more expensive abroad.

Trade Surplus Narrows

The Czech Republic's trade surplus narrowed in July from the previous month. Goods flowing out of the country exceeded imports by 7.2 billion koruna ($421 million), compared with a revised 15.3 billion koruna in June and a 1.6 billion-koruna deficit a year ago.