Czech Interest Rates unchanged at 2.0%

Jon — Mon, 03 Jul 2006 16:01:35 +0000

The Czech central bank (CNB) kept interest rates unchanged last week for the eighth consecutive month, leaving its key policy rate at 2.00%. The decision was broadly expected, as inflation is still well contained. However, we think a restart of the tightening cycle is moving closer.

May’s inflation accelerated above the upper end of central bank’s official inflation target of 3%. Even though inflation is currently mostly driven by rising regulated prices, it is clear that domestic spending is rebounding. This was underlined by GDP growth in the first quarter, when consumer spending made a significant contribution along with exports and investment. We believe consumer spending will continue to rise, and this might eventually put some additional pressure on inflation. Also, do not forget that the Czech koruna has weakened lately on the back of global factors such as rising interest rates, and therefore the currency no longer represents an anti-inflationary risk to the CNB inflation forecast.

Rebounding consumer spending and global factors suggest the Czech central bank will have to restart its tightening cycle sooner rather than later. While we expect the first hike of 25bp in 3 months’ time, one could speculate that a higher-than-expected figure for June inflation and the CZK continuing to slide might prompt the CNB to hike as early as July. The new quarterly inflation forecast will be published in July and, in the past, the CNB board has moved rates in conjunction with its release.

SOURCE: Danske Bank

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Czech Interest Rates unchanged at 2.0%