Analysts: Central bank likely to keep rates flat due to weak crown

Prague, Oct 29 (CTK) - The Czech National Bank (CNB) will leave interest rates unchanged at its policy meeting on November 5 mainly owing to the weakening of the crown in the past weeks, according to most analysts polled by CTK.

Next year, interest rates should gradually increase, economists said.

All the seven members of the CNB Bank Board should attend the monetary policy meeting on Thursday next week. The CNB's key two-week repo rate is now at 1.25 percent, the lowest level ever.

"Although some central bankers recently still seriously considered the need to cut interest rates, the weakening of the crown changes the view of the matter fundamentally," UniCredit Bank analyst Pavel Sobisek said.

"The crown has lost almost 5 percent against the euro since the CNB's last meeting, which has a similar influence on monetary conditions as if the CNB cut its interest rates by the entire percentage point," Sobisek said

Atlantik FT chief economist Petr Sklenar also said the crown's weakening has raised the chances that interest rates will not further decrease and remain without changes.

On the other hand, Sklenar expects a hike in the rates by a quarter of a percentage point at the end of the first quarter of 2010 or early in the second quarter.

"We do not expect a change in rates at the November meeting, either. The Czech crown has weakened to a level where the CNB expected it to be in the fourth quarter in its forecast," said Raiffeisenbank analyst Michal Brozka.

But not even a drop in interest rates would be a surprise, given above all the expected low inflation and the approval of the government's package of austerity measures, Brozka said.

"The latest statements of the central bank's members as well as the voting of governor Zdenek Tuma at the last CNB meting raise the chances of a rate cut," he said.

At the policy meeting at end-September, CNB governor Tuma and vice-governor Miroslav Singer both voted for a 0.25 percentage point rate cut. But the other CNB Bank Board members voted for leaving the rates unchanged.

CSOB analysts Petr Dufek expects the central bank to cut interest rates at the November meeting owing to a weaker economic outlook and the expected low inflation.

Komercni banka analyst Jiri Skop also reckons with a rate drop, the main reason also being a slowdown in inflation. Skop does not even rule out a decrease of more than a quarter point.

However, CNB Bank Board member Robert Holman, for example, said on Monday that interest rates should remain stable until the global economy recovers.

Another rate cut could have only a limited impact and could make the crown volatile, Holman said.

"If I should decide amid a higher level of uncertainty, I will always prefer the stability of interest rates to considering whether they should change in one or the other direction," he said.