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Czech Watch – 4 October 2001

4.10.2001 8:49

- CNB vice-governor Ludek Niedermayer said that despite recent interest rate cutting in most developed economies, monetary easing in the Czech Republic is not on the agenda, first of all due to strong domestic demand. Also economic slowdown in Western Europe aggravated by negative consequences of the recent terrorist attack in the USA should dampen Czech inflation next year. Niedermayer denied the suspicion that the central bank might keep its rates unchanged because of a fear that growing interest rate differential between Czech and world interest rates could provoke a strong inflow of speculative capital to the Czech economy. The CNB vice-governor rather warned against expansive fiscal policy and growth in wages. According to Niedermayer, the present higher inflation naturally boosts wage growth demands. Because foreign demand for Czech exports is likely to weaken next year, competitiveness of Czech companies will be hurt if wages increase inappropriately high.

- The cabinet passed a bill proposing bringing excise duties to the level common in the EU only upon the accession of the Czech Republic to the Union. The law should be fully compatible with the EU legislation, except for areas where the Czech Republic has asked for phase-in periods. Rates will actually grow only at some commodities as excise duties on beer, wine or alcohol are already on the EU level and excise duties on some other commodities are even higher in the Czech Republic than in the EU. The Finance Ministry originally proposed a partial growth in excise duties preceding the accession.

- Ludek Niedermayer announced that the payment for KB (more than EUR 1.18bn) has not been received yet but should arrive in just a few days. Then it would not be converted into crowns fast, but over a certain period of time. Niedermayer refused market expectations that the euros would be converted into crowns immediately because of the bad need of the National Property Fund for money allowing the NPF to meet its obligations. Niedermayer also said that a part of the payment would be used for settlement of government’s bills denominated in foreign currency and therefore it need not be converted into crowns at all. The Czech crown reached record highs against the euro in the last few days in anticipation of the payment for KB. After Niedermayer's statement, the crown dropped to 33.60 CZK/EUR.

- The cabinet approved a draft bill on state guarantees for damages caused by the operation of airplanes by domestic air transporters during war conflicts. The proposal reckons with guarantees for damages worth up to USD 0.5bn. The cabinet decided on the state guarantees last week, after Czech insurers started to back away from parts of insurance contracts with air transporters, concerning war conflicts, and demanded a considerable cut in insurance claims. If the cabinet had failed to adopt additional guarantees, air traffic would have stopped, since the individual countries had refused to allow insufficiently insured aircraft to fly in their airspace. The guarantee will apply to all eight licensed Czech air transporters.

- The Czech crown was firming against the euro during early trading hours on Wednesday up to a new record level of 33.46 CZK/EUR. Then the trend reversed as a result of comments by CNB Vice-governor Niedermayer, who called the current strengthening of the crown ungrounded and speculations concerning the approaching payment for KB irrational (see above). Vis-a-vis USD, CZK tracked the euro/dollar development. CZK/EUR was trading at 33.74/77 late on Wednesday, down from 33.59/62 a day earlier. Against the dollar, the crown closed at 36.75/77, only slightly down from late Tuesday’s 36.71/74.

- Bond prices finally dropped on Wednesday after hectic trading. Yesterday’s interest rate cut in the U.S. encouraged investors in the morning but later hawkish comments by Ludek Niedermayer acted like a cold shower for them. After another up and down, the longest state 6.95/16 bond finally closed at 105.80/10, 20bps below its closing price on Tuesday, yielding 6.32/29 %. The state 6.75/05 lost 15bps to 103.15/40, yielding 5.68/60 %.

Late on October 3 bond yield Late on October 2
State 6.75/05103.15/405.68/60103.30/55
State 6.95/16105.80/106.32/29106.00/30

(Martin Kupka)

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