At its last policy meeting, the Governing Board of the Czech National Bank (CNB) surprisingly brought interest rates down by 25bps. Hence, the discount rate stands at 0.75%, the 2-week basic repo is at 1.75% and the Lombard rate is at 2.75%. The rates are at their lowest levels ever and below the euro zone levels.
The central bank decreased rates despite analysts' expectations that CNB will keep them flat. CNB governor Zdenek Tuma said that interest rate should stay flat at 1.75% in the second half of the year. The main argument that made the CNB cut lending rates was the expected drop in inflation.
CNB revised downwards its inflation forecast predicting that CPI would grow by 1.3 – 2.7% in the next twelve months. In its January economic forecast the CNB predicted twelve month inflation of 1.6 – 3.0%. The central bankers explained that drop in import prices this year and the slower economic growth abroad would be main factors for the low inflation.
In addition, the central bank also revised its GDP growth forecast for this year, expecting y/y growth of 3.6% to 4.6%, while the previous estimate was for 3.5-3.7% y/y growth. The CNB's new economic forecast is in line with the revised finance ministry estimates. Furthermore, analysts agree that interest rates cut could boost domestic demand, thus acceleration of economic growth is likely, especially having in mind that the political situation is almost stabilized.
Deputy PM Martin Jahn, commenting on CNB decision, said that the economy might grow by 4.0-4.5% y/y in 2005. We note that the all-time low interest rate is below the euro zone level and most probably will cause
depreciation of the crown, thus supporting exports, but at the same time significant capital outflow of
the country could appear.