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Czech Watch – 13 July 2001

13.7.2001 8:45

- In the minutes from the monetary session of the CNB Board held on June 28, CNB admits that the Czech economic recovery proceeds faster than central bankers expected. The decline in unemployment and a fast growth of the money supply have been symptoms of the growth acceleration. According to the Board, Czech inflationary risks have increased since May but the currently prevailing inflation factors have still been cost-related rather than demand-induced and temporary rather than permanent. However, "the rate of economic growth might reach a level generating demand inflation," stands in the minutes. Among the possible inflationary risks, CNB explicitly mentions a growth in households' propensity to consume, perhaps due to "an increase in consumer optimism supported by rising incomes". Board members also reminded that a rise in the inflation level from 3-4 % to 5.0 % might boost inflation expectations in the Czech economy. The Board also discussed the optimal setting of interest rates. "If the economy experienced a recovery phase coupled with loosened fiscal policy, then a different level of rates would be required than, for example, during an economic decline or slow-growth phase", the CNB Board warned. Board members also agreed that “the next economic forecast could bring a substantial reassessment of the current economic outlook". At the end of the session, the Bank Board decided to let the key two-week repo rate unchanged with a four-to-one vote.

- The Chamber of Deputies rejected in the first reading the government-proposed bill on a state bond issue to cover the 2001 budget deficit. The cabinet suggested issuing bonds worth CZK 40bn to cover part of the deficit. The rest of the planned deficit, CZK 8.9bn, was proposed to be financed via short-term financial instruments. The finance ministry said in a report accompanying the bill that it may need to tap the bond market to cover part of this year's deficit already this year because it may hit the ceiling for issuance of treasury bills.

- CzechInvest attracted foreign direct investment worth USD 4.2bn to the Czech Republic from 1993 to end-June 2001 and completed 136 projects creating over 42.8t new jobs. The most active investor countries have been Germany (USD1.14bn), the Benelux (USD 844m) and Japan (USD 786m). A large part of the investments went into the automotive industry (USD 1.53bn), electronic and electromechanical industry (USD 1.44bn), textile industry (USD 279m), wood processing, paper and printing (USD 253m) and chemicals and plastics (USD 204m).

- The Chamber of Deputies passed a higher ceiling for compensation to be paid out to clients of bankrupt banks. The rate of compensation remains 90 % of the deposits, but the maximum possible compensation reaches now CZK 1m instead of the former CZK 400t. The law also reckoned with compensation to the clients of failed Pragobanka, Moravia banka and Universal banka who have not received any money back yet. In their case, the compensation should reach up to CZK 4m.

- The Czech crown tracked the rebounding Polish zloty on Thursday back to levels seen before the past week´s fall. On Thursday afternoon, the crown was trading at 33.77/84 to the euro, well above 33.95/98 late Wednesday. The crown/dollar dipped to 39.58/67 from late Wednesday’s 39.43/45.

- CNB's decision not to touch the interest rates did not help bonds, which continued their fall from the previous day, brought on by bad June inflation figures. The longest state 6.95/16 bond lost 40bps to 97.90/20, yielding 7.18/15 %. The state 6.75/05 fell 10bps to 100.80/10, yielding 6.48/38 %. On Friday, CNB will auction a CZK 4bn tranche of the state 6.30/07 bond.

late July 12 bond yield late July 11
State 6.75/05100.80/106.48/38100.90/20
State 6.95/1697.90/207.18/1598.30/60

(Martin Kupka)

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