Thursday, September 25, 2008

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.

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