Czech central bank watches and waits, for now

By bne IntelliNews August 2, 2012

Nicholas Watson in Prague -

As widely expected, the Czech National Bank (CNB) on Thursday, August 2 kept its policy interest rate unchanged at a record low of 0.5%. But with the economy continuing to weaken, the odds are growing that the bank will make one further cut of 0.25 percentage points before the year is out.

The CNB said there had been "a marked slowdown in external demand and subdued domestic demand against the background of fiscal consolidation".

Indeed, purchasing managers indices for July showed that Czech manufacturing contracted again for the fourth consecutive month, with the new export orders sub-index remaining particularly weak at 47.9, reflecting poor economic conditions in the rest of Europe, particularly Germany.

The CNB said it has lowered its outlook for the GDP this year to a contraction of 0.9% compared with a previous prediction of zero growth. Next year, it sees growth of just 0.8%, down from a previous forecast of 1.9%.

The worsening economy prompted the central bank to cut its rate by 0.25 percentage points on June 28. Miroslav Kalousek, finance minister, followed that on July 20 by saying he would ease up on the government's austerity drive to give the floundering economy a boost.

Kalousek has been criticised for cutting spending too far too fast and tipping the economy back into recession in the first quarter, when GDP shrank by 0.8% from the quarter before. The finance ministry now expects the economy to shrink by 0.5% this year, rather than grow 0.2% as it had been forecasting in April.

With August's macroeconomic data all pointing to a further deterioration in the Czech economy - Komercni Banka sees month-on-month declines in industry, exports, construction and retail sales - and two of the six CNB board members voting on Thursday for an interest rate cut, many economists expect another rate cut this year, possibly as soon as September.

"The growth outlook remains a serious concern, while fears about inflation have subsided in recent months," William Jackson, emerging markets economist for Capital Economics wrote in a note following the CNB decision. "We have now pencilled in one further 25 bp rate cut this year, bringing the benchmark rate to 0.25%."

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