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ČNB cuts key rate to record low

The Czech National Bank (ČNB) has cut its key interest rate by a quarter of a point to a record low 0.5 percent, in line with market expectations, after months of sluggish domestic demand having sparked an economic recession.

“Today’s rate cut didn’t come as a surprise to us given the dismal condition of the Czecheconomy. We have been arguing for some time that the Czech central bank needed to takesome action to stimulate economic growth by easing monetary conditions further,” Danske Bank analyst Stanislava Pravdova said in a flash comment.

According to the last GDP data, the Czech economy fell into a recession in the fourth quarter of 2011 as it dropped 0.2 percent quarter on quarter. In the first quarter of 2012, GDP lost 0.8 percent on the quarter, according to the Czech Statistical Office (ČSÚ). Inflation eased to 3.2 percent in May, the lowest this year, from 3.5 percent in April.

At a press conference following the announcement, ČNB Governor Miroslav Singer said that the risks to the Czech economy are skewed to an alternative scenario, which assumes more government austerity, lower monetary inflation and lower interest rates. A weakening of the Czech koruna is the main pro-inflationary risk at this point, Pravdova said.

“[Although] today’s rate cut is clearly good news for the Czech economy, on the other hand it might only have a limited impact and other non-standard monetary policy tools might be needed to spur the economy and to fundamentally turn around the growth outlook. For now, the outlook for the Czech economy looks fairly gloomy and we expect it to contract over 1 percent this year,” she said.

The last interest rate cut came over two years ago, in May 2010, when the central bank lowered the two-week repo rate by 25 basis points to 0.75 percent.

The ČNB Bank Board on Thursday also lowered the Lombard rate was by 25 basis points to 1.50 percent. However, it left the discount rate unchanged at 0.25 percent because some regulations still use a multiple of the discount rate in sanction and similar provisions as a basis for calculating penalties, fines, sanction fees, etc.

“From the perspective of the spirit of the law the ČNB deemed it justified to keep the sanction amounts above zero in such cases,” bank spokesman Marek Petruš said in a statement. The bank will publish minutes from Thursday’s meeting with the votes of individual board members on July 9.