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Czech Watch – 27 July 2001

27.7.2001 11:20

- CNB Board raised the two-week repo rate from 5.00 % to 5.25 % on Thursday, the discount rate from 4.00 % to 4.25 % and the Lombard rate from 6.00 % to 6.25 %. The changes are valid as of today. According to CNB vice-governor Ludek Niedermayer, central bank sees rosy future economic growth in the Czech Republic, but its inflationary outlook remains negative. The current inflation is pushed up primarily by cost factors, namely food prices. "We expect these factors to fade away gradually, but they will be replaced by demand factors, especially next year. Most risks suggest that inflation will be higher than expected," Niedermayer added. Pavel Racocha, another member of the CNB Board, observed that the rates hike was also due to a revision of the Czech Statistical Office's data concerning changes in household consumption.

- Ministry of Finance published a fresh set of macroeconomic forecasts on its website. As for 2001, the Ministry now expects GDP growth to be +3.6 % (up from +3.5 % in April), CPI growth +5.1 % (up from +3.9 %), trade deficit CZK 160bn (up from CZK 150bn), and unemployment rate 8.4 % (up from 8.3 %). As for 2002, GDP growth prediction is unchanged (+3.8 %), inflation rate is newly predicted to be +4.6 % (up from +4.4 %), trade deficit CZK 170bn, and unemployment rate 8.2 % (up from 7.9 %). The current account deficit is estimated to rise from USD 3.0bn (5.6 % of GDP) this year to USD 3.1bn (5.4 % GDP) in 2002. The C/A deficit should be covered by a surplus on the F/A, backed by an inflow of foreign investment. Public budgets deficit is expected to reach CZK 170.7bn (8.1 % of GDP), an improvement from the previously estimated CZK 184.4bn, and the gross public debt is estimated to amount to CZK 403bn (19.1 % of GDP) by the end of this year. The Ministry considers a sharp growth deceleration in countries of the major Czech trading partners a considerable short-term risk for the domestic economic growth. But the chief risk should be the imbalance in public finances.

- The cabinet decided to postpone its decision on the restructuring of IPB and transfer of assets from IPB to Konsolidacni banka. The reason is that the anti-monopoly office should first check a clause in the contract addressing CSOB's payment for a state guarantee. UOHS is now examining whether the clause does not imply unauthorized government assistance. If UOHS does not approve the clause, it will be removed from the contract. On a related note, the Ministry of Finance announced that last year's contracts for the sale of IPB to CSOB would be published on the ministry's website next week.

- The government at its meeting on Wednesday approved an outline of the state budget for 2002, with a deficit of CZK 53.9bn including the loss of Konsolidacni banka. The Finance Ministry will now be setting the limits for individual ministries. The limits should be ready by the end of August so that the government could discuss the first version of the budget bill in the first decade of September.

- The government approved a five-year contract with Cesky Telecom worth several billion crowns a year on building and operating the public administration infrastructure. The contract is to be signed by end-October. The telecom infrastructure should be built in two years. The Transport Ministry expects the project to rise the value of Cesky Telecom before its privatization. Other telecom operators protest against the government's decision to grant the order without a tender.

- The crown dipped to 33.89/92 to the euro late Thursday from 33.87/90 late Wednesday. The crown/dollar weakened to 38.67/69 from 38.50/53 late Wednesday.

- Czech bonds fell after CNB surprised the market with a 25bps rate hike. The state 6.95/16 bond dropped 45 basis points to 98.85/15, yielding 7.07/04 %. The state 6.75/05 lost 25bps to 100.90/20, yielding 6.44/35 %.
late July 26 bond yield late July 25
State 6.75/05100.90/206.44/35101.15/45
State 6.95/1698.85/157.07/0499.30/60

(Martin Kupka)

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