Czech c-bank holds rates close to zero, says probability of FX interventions stays high

By bne IntelliNews September 26, 2013

The Czech central bank decided on Sept 26 to keep interest rates at record-low levels in line with market expectations and said that the probability of launching foreign exchange interventions to further weaken the monetary condition remains high.

The bank’s board voted unanimously to keep the main two-week repo rate at 0.05% for the seventh straight meeting after cutting it down by 20 basis points in November, the bank said in a statement on its website. The Czech rate is at almost half a point below the European Central Bank’s main rate. The Lombard rate that provides a ceiling for short-term interest rates on the money market was left at 0.25% and the discount rate that represents the floor for short-term money market interest rates was kept at 0.05%.

The bank has for months said it is considering stepping into the currency market for the first time in more than a decade to weaken the koruna and help the economy that has just emerged from a record-long recession. After at the previous meeting on August 1 the bank’s board held its first vote on FX interventions and did not approve the motion, on Sept 26 the board again voted and again the motion failed to be backed by the majority of rate setters, governor Miroslav Singer told a news conference after the meeting. Recent economic data showing an improving economy are arguments for the central bankers who want the bank to hold off on koruna sales but slowing inflation warrants a move to weaken the koruna. A weaker local currency will boost exports that account for some 80% of the country’s economic output, increase import prices and limit deflation risks.

The koruna strengthened against the euro after the bank voted against currency interventions. It traded at 25.692 per euro by 1345 GMT on Sept 26, up 0.6% on the day, Reuters reported.

The bank's current forecast assumes a decline in market interest rates to zero followed by a noticeable hike in 2015. Inflation pressures are expected to stay muted. The risks to the inflation forecast are slightly on the downside, tiled towards the need for slightly easier monetary conditions, the bank said.

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