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Deep cuts

Czech National Bank drops a dramatic 75 points from interest rate - with more cuts expected

By Stephan Delbos
Staff Writer, The Prague Post
November 12th, 2008 issue

ČTK
ČNB Governor Zdeněk Tůma received praise for his bank's intervention to boost economic growth.
The Czech National Bank (ČNB) announced an interest rate cut of 75 basis points to 2.75 percent Nov. 6 to compensate for the lower forecasted 2009 GDP growth of 2.9 percent.
Spokesmen for the ČNB had previously announced that the bank was considering a cut but gave no suggestion of such a dramatic intervention. The crown lost almost 25 hellers against the euro shortly after the announcement. Analysts who had largely predicted a 25-point cut applauded the ČNB’s decision but cautioned that other measures may be needed to keep the eurozone-dependent economy afloat in the midst of a European recession.
“What the ČNB has done is compensate for the negative effects of the environment, but other steps from the U.S. and Europe must now happen to calm down investors,” said David Navrátil, head economist at Česká spořitelna. “We also expect the ČNB will cut rates again in December.”
The extent of the ČNB’s cut far exceeds the expectations of analysts, who predicted a maximum cut of 50 basis points. But many say dramatic intervention was needed to boost growth and weaken the Czech crown, which has wreaked havoc with Czech exporters over the past six months.
“Of course, [the cut] was dramatic. It’s a very big cut, but it reflects the current situation,” said Martin Hatlapatka, analyst at Cyrus.
Analysts say that such an interest rate intervention is the ČNB’s most efficient tool to weaken the strong crown and bring relief to the export industry, which has lost an estimated 80 billion Kč year on year, and supplies 80 percent of the Czech GDP. The ČNB last made a cut in August, a more modest one of 25 points.
“The Czech crown could weaken a bit immediately,” said Vladimír Pikora, chief economist at Next Finance. “This opens the stage for the crown to weaken to a base of 25.50, which is a reasonable value.”
Most hope a cut in interest rates will also boost public confidence and promote trust on the interbank lending market, which has been stalled recently in reaction to the European Commission’s predictions of recession throughout the European Union.
“We can already see some positive effects on the interbank market and for clients in the Czech Republic. This is the first step toward dealing with lowered expectations of GDP growth,” said Hatlapatka.
But some analysts are more conservative, saying that the final effects of the ČNB’s intervention and the immediate future of the Czech economy depend on how the market reacts over the next two weeks to the interest rate cut. Ultimately, there remains a difference between the suggested ČNB interest rate and the actual market interest rate. While the ČNB’s suggestion usually has an immediate and powerful effect on the market rate, recent economic instability has shaken the credibility of all financial institutions and lessened their powers of intervention.
All in the same boat
“The ČNB cut interest rates two months ago, but the Pribor rate went up, so the situation now is completely different,” said Aleš Michl, analyst at Raiffeisenbank. “We need first market trust, then stability will come.”
The problems caused by a strong crown have lessened recently as the currency has fallen against both the dollar and the euro, and that trend was compounded by the ČNB’s intervention, but analysts are anxiously watching a eurozone economy that is expected to fall into a recession over the next year. Many say that the immediate future of the Czech economy depends mostly on what happens in Western Europe.
“The Czech economy will be [greatly] influenced by the European economy. At the first signs of recovery there, the Czech economy will grow more quickly,” said Hatlapatka. “We’ll see a quick slowdown, but we could also see a quick recovery.”
The ČNB’s latest forecast of 2.9 percent GDP growth is significantly lower than its previous prediction of 3.6 percent. The new estimate shows a significant slowdown, caused, in part, by the European recession and its effects on the Czech export industry. But the general economic forecast from analysts, the ČNB and the Finance Ministry remains positive, as they all spin the slowdown as a return to normal growth.
“We are all in the same boat, either all right or all wrong,” said Michl. “If there’s [a] recession in Europe and we have almost 3 percent growth, that’s very good.”
Despite the Czech Republic’s reliance on the export industry, Czech and European analysts predict slower but steady growth for the country in 2009. The key to the Czech economy’s buffer is the strength and reliability of its work force, which has remained a lure for foreign investors interested in setting up business in the Czech Republic despite relatively high startup costs, Navrátil said.
“Investors say Czech workers are very productive,” he said. “This might be a reason why foreign investors still like the Czech Republic.”

Stephan Delbos can be reached at sdelbos@praguepost.com


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Reader's comments:

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[23:04 04/12/2008] : Is anyone sure anymore that whatever Central Banks do is enough? I'm not convinced this is the case and think there's some way to go. A 2% interest rate sounds right to me.
Alistair Knox-Crawford
Prague
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