Czech Central Bank Cuts Interest Rates

By: Victoria_Marklew

As anticipated (see Daily Global Commentary, July 30: " Surging Central European Currencies: Running Out of Steam? "), the Czech central bank switched to easing mode yesterday, lowering its key repo rate by 25bps to 3.50% - the first actual cut in over four years. Governor Tuma noted that the Czech economy is in a "declining phase" and that a "bigger dampening" is now expected. The bank also lowered its GDP growth forecasts to 4.1% this year (prev. 4.7%) and 3.6% in 2009 (prev. 4.0%). Tuma also warned that he could not exclude another rate cut this year. The vote by the six-member policy board reportedly was unanimous.

Although July inflation picked up again, with annual CPI at 6.9% (6.7% in June), other data releases today confirmed the picture of a slowing economy. Industrial output rose just 2.2% on the year in June (3.4% in May), while the rate of unemployment accelerated to 5.3% in July from 5.0% in June. Last week, the Markit survey reported that the manufacturing sector PMI for July dropped to 49.9, down from 50.7 in June - the first time the index has slipped below the growth-contraction level of 50.0 in over five years.

It remains to be seen whether this week's easing will be the first in a series for the Czechs, and neighboring Hungary and Poland are unlikely to switch to easing mode before Q4. However, any weakening in the crown over Q3 will likely not be enough to counter the economic slowdown heading into 2009. With a focus on the outlook 12-18 months ahead, the Czech central bank is likely to cut at least once more before the year is out.

By Victoria Marklew
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Victoria Marklew is Vice President and International Economist at The Northern Trust Company, Chicago. She joined the Bank in 1991, and works in the Economic Research Department, where she assesses country lending and investment risk, focusing in particular on Asia. Ms. Marklew has a B.A. degree from the University of London, an M.Sc. from the London School of Economics, and a Ph.D. in Political Economy from the University of Pennsylvania. She is the author of Cash, Crisis, and Corporate Governance: The Role of National Financial Systems in Industrial Restructuring (University of Michigan Press, 1995).

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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