UPDATE 1-Czech c.bank holds rates after rise in crown

19.12.2007 | , Reuters
Zpravodajství ČTK


perex-img Zdroj: Finance.cz

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By Marek Petrus

The Czech central bank (CNB) held interest rates steady on Wednesday, opting to wait for more information about price growth in the light of record strength of the crown and its dampening effect on resurgent inflation.

At this year's last meeting, policymakers kept the main two-week policy repo rate at 3.50 percent, its highest level in 5-1/2-years and 50 basis points below the euro zone equivalent.

A news conference was called for 3 p.m. (1400 GMT).

The CNB paused in policy tightening after a 25 basis point rate increase in November, having doubled the benchmark credit costs from an all-time low of 1.75 percent in October 2005.

Eleven of the 16 CNB watchers surveyed by Reuters last week forecast no change against five expecting another quarter-point hike [CNB/INT].

"The previous rate hike series was very much forward-looking from the CNB," said Ales Michl, analyst at Raiffeisenbank.

"Central bankers can now wait for new macroeconomic data, crown developments and a new macroeconomic forecast, and then decide what to do next," he added.

All analysts agreed the outlook for inflation to possibly leap early next year above 6 percent justifies a pre-emptive rate rise soon to anchor inflation expectations at a low level.

Soaring food prices boosted annual inflation to a six-year high of 5 percent in November, well above the 4 percent upper edge of the CNB's comfort zone as well as its staff forecast.

However, the majority said the record strength of the crown and the prospect of slowing consumption growth, both likely to work to tame inflation, would make policymakers hold off from tightening policy just yet.

RATE HIKE SEEN IN EARLY 2008

The CNB has not changed interest rates at a pre-Christmas meeting since 1998 when it cut the main rate to 9.50 from 10.50 percent. Many analysts also said the board would be loath to tighten policy again less than three weeks since the last rise.

The next scheduled rate meeting is on Feb. 7 when the board will also have a quarterly update of its inflation projections.

Of the 11 analysts who expected no rate change in December, 10 forecast a 25 basis point increase in the first quarter and one saw such a hike coming in the second quarter of next year.

"I would imagine that the board opted to wait for the updated quarterly inflation report for guidance on the inflation risks and outlook going forward," said Silja Sepping, economist at Lehman Brothers in London.

The crown has rallied nearly 10 percent versus the euro since this year's lows in early July, as investors unwound risky bets in high-yield assets funded out of low-yield crowns and exporters pre-hedged their receipts for next year.

The currency's strength tends to filter quickly through to the small and very open Czech economy, taming import price inflation and eating into firms' export sales.

The crown inched lower to 26.220 per euro by 1125 GMT after the rate announcement from 26.160 just before, but held within sight of last week's lifetime high of 25.933.

Market interest rates also fell slightly. (Editing by Stephen Nisbet)

Keywords: CZECH RATES/

[PRAGUE/Reuters/Finance.cz]

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