Czech Watch - 31 August 2001

The Czech National Bank Board did not touch interest rates yesterday but the board was split over the decision. CNB Vice-Governor Oldrich Dedek told a news conference after the meeting that "The bank board still very sensitively perceives arguments for raising interest rates and risks connected with that remain valid". Dedek also said that the board did not know of the ECB´s interest rate cut the same day by 25bps, suggesting the CNB was not concerned about possible growth in interest rate differential between crown and euro assets. Dedek´s comments after the meeting reinforced the belief that Czech rates will go up sooner or later, and central bankers are just waiting for important macroeconomic data (Q2 current account, August CPI and Q2 GDP) to be released in September for a more accurate calibration. According to the latest CNB prediction, net inflation will stand at 4.3-5.0 % at the end of this year, well above the bank's 2.0-4.0 % target. (The net inflation index excludes state-regulated prices and price movements due to tax changes.) The central bank believes inflation would return to its target corridor in mid-2002.

CSOB will most likely refuse to change the document concerning the compensation of the guarantee for IPB's sale. Last Wednesday, the government approved the documents related to last year's granting of a government guarantee to CSOB in the sale of IPB, with the exception of the document on compensation for the guarantee which had not been approved by the anti-monopoly office (UOHS). Deputy Finance Minister Janota said on Wednesday that the document would have to be changed and the Finance Ministry and CSOB should reach agreement on a new version within a month. The controversial point of the document concerns the amount, which CSOB would have to pay for last year's government guarantee if IPB's worth was positive.

Nearly 90 % of CSA pilots is ready to join a planned strike in support of their wage demands on Friday. Talks between pilots and the CSA management continued yesterday and certain progress seems to have been achieved. The pilots demand a 37 % rise in their wages in excess of the 51 % growth under the collective agreement for the next three years. Unless the two parties reach agreement, the strike starts at 8:00 a.m. In case the strike takes place the CSA is talking with other airlines about a transfer of passenger to their flights.

The Association of Driving Schools and the Association of Small Car Importers are planning a "a star-like" blockade of Prague on Wednesday, September 5. Action participants would jam Prague access routes during the action. The associations require personal changes at top positions of the ministry, including dismissal of Minister Schling.

The Czech crown changed little on Thursday as it tracked the euro/dollar and shrugged off the CNB decision to leave interest rates flat. Late on Thursday the crown/euro stood at 34.23/26, marginally below the level of 34.21/24 late on Wednesday. The crown/dollar rose to 37.42/44 from the 37.61/63 late Wednesday.

Bond prices went up slightly after the CNB decision, but government bonds fell back below previous levels soon. The longest state 6.95/16 rose 10 basis points to 102.65/95 after the news, then fell to 102.30/60, down 20 basis points from Wednesday's close, yielding 6.69/66 %. The state 6.75/05 also rose 10bps before falling back to Wednesday’s closing level of 101.90/20, yielding 6.11/01 %. Corporate bonds benefited from the ECB rate cut (following the cut, the price of Unipetrol 9,00/04 jumped 70bps).

	Late on August 30	bond yield	Late on August 29
CZK/EUR	34.23/26	-	34.21/24
CZK/USD	37.42/44	-	37.61/63
State 6.75/05	101.90/20	6.11/01	101.90/20
State 6.95/16	102.30/60	6.67/64	102.50/80

(Martin Kupka)