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A new all-time low for CNB rates; EU summit boosts CE currencies

A new all-time low for CNB rates; EU summit boosts CE currencies

29.6.2012 9:47

On Thursday, CE currencies trading followed the same scenario as on the day before. Namely, the koruna outperformed its peers and despite the cut in interest rates posted solid gains.

Regarding the Czech National Bank (CNB) meeting, the bank met expectations and cut its base interest rate by 25 basis points to a new all time low of 0.50%. The market had anticipated this; calls for a rate cut have been increasingly heard from the CNB recently. In the end, the vote was fairly narrow, 4:3, with three members voting for rate stability. The result of the vote confirmed the tenor of the CNB forecast, consistent with which is a decline in market interest rates for the remainder of this year, followed by a rise in rates as from the second half of 2013.

In addition, at the post-meeting press conference, it was stated that the risks were skewed towards the alternative ‘fiscal’ scenario, which envisaged even lower rates, albeit under higher headline inflation (if the tax changes proposed are passed by Parliament). Multiple factors had favoured the rate cut: a lower current inflation rate, a worse development of the Czech economy, an anticipated cut in euro rates, and lower commodity prices. Now the CNB sees major risks in the fiscal consolidation (with a negative impact on demand), developments abroad, weaker domestic economic activity, and domestic price developments. By contrast, the central bank views a weaker koruna exchange rate as the major risk on the upside.

This was likely the last consecutive rate cut, which might be followed by a fairly long period of stability now. That said, monetary conditions are also being eased by a weaker koruna, and thus the CNB might not a priori cut rates even closer towards zero, even if the alternative scenario were actually to happen.

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