By Peter Laca (Bloomberg, 26.1.2010)
The Czech central bank probably won’t raise interest rates until the third quarter as koruna gains keep a lid on inflation, taking pressure off policy makers to reverse monetary easing, board member Vladimir Tomsik said.
“The rate increase may come in the third quarter at the earliest,” Tomsik said in an interview in Prague yesterday. “I personally can see a possibility the rate increase will be delayed, and come later than was expected in the November forecast.”
The central bank, which in November signaled borrowing costs may start rising as early as next quarter, last month cut the repo rate to a record-low 1 percent, making it eastern Europe’s only regulator to match the European Central Bank’s benchmark rate. The Czech bank will be able to push back tightening as an improved current account outlook underpins a stronger currency, Tomsik said.
“If the convergence process resumes, and if there is a favorable trend in the balance of payments, it should lead to koruna appreciation,” he said. “A strengthening exchange rate helps to tame inflation pressures and thus do part of the work.”
The current account deficit will narrow to 0.8 percent of gross domestic product in 2010 from a 3.1 percent shortfall in 2008, the central bank estimated in November. It publishes a new set of economic forecasts at its next rate meeting on Feb. 4.
The koruna lost as much as 0.8 percent against the euro and was trading at 26.065 at 11:14 a.m. in Prague. The currency lost as much as 1.1 percent against the dollar.
Economy to Slow
The central bank estimates that a 1 percent strengthening of the koruna against Europe’s single currency shaves as much as 0.25 percentage point off the inflation rate. The koruna gained 2.5 percent against the euro in the first three weeks of the year, outperforming Poland’s zloty and the Hungarian forint in the period. That’s allowing the bank to keep policy loose to spur growth after the country suffered its worst recession since abandoning communism in 1989.
Output growth will slow in the next two quarters, Tomsik said, and a delay in raising central bank borrowing costs will allow the economy more time to recover.
The $200 billion economy, where exports account for about 70 percent of gross domestic product, probably contracted 4.4 percent last year, the central bank estimates, after the global trade slump hurt sales abroad of products including Skoda cars.
Weak demand and tight credit sent fixed investment down 24 percent in the third quarter from a year earlier. That’s prompted companies to eliminate jobs, sending the unemployment rate to 9.2 percent in December.
Lagging Inflation
Inflation has lagged behind the central bank’s 2 percent target since it was introduced in November. Inflation relevant for policy decisions, which is price growth adjusted for changes in indirect taxes, will stay below 2 percent this year.
The Czech interest rate path will continue to be influenced by interest-rate developments in the euro area, Tomsik said. The central bank expects gross domestic product to grow 1.4 percent this year, compared with an ECB forecast of 0.8 percent expansion of the economy of the 16 nations sharing the euro.
The Czech Republic joined the European Union in 2004, and hasn’t set a date for euro adoption.