Czech National Bank cuts rates to record low

The Czech National Bank (CNB) governing board today (September 27) voted to lower its policy rate by 25 basis points to a record low of 0.25%. CNB governor Miroslav Singer said after the move that the central bank may also make foreign exchange interventions in future.

Presenting the board's decision, Singer said growth in the Czech Republic had contracted both year-on-year and quarter-on-quarter in the second quarter of 2012. Unemployment rose moderately in Q2 and "negligibly" in Q3, reaching 8.6%.

The central bank forecasted that inflation, currently above the 1–3% tolerance band at 3.3%, would fall back towards the target in late 2012, and thereafter will remain in the centre of the band.

With few signs of an improvement in the economy, Singer said the CNB would consider using unconventional policy tools in the future. "We have definitely agreed that, should we feel the need to also use other tools… then it would most likely be the exchange rate channel through which we would try to work," he said.

However he said the central bank would exhaust other options, such as cutting rates to zero, before debating whether to introduce further measures.

William Jackson, an emerging markets economist at Capital Economics, said in a research note that the CNB would likely have to take unconventional measures in 2013. "We don't expect an immediate move in this direction, but with the economy showing no signs of picking up, we do think the Bank will be forced into action in 2013," Jackson said.

He suggested that purchases would probably be sterilised initially, but the central bank might subsequently consider unsterilised purchases, thereby expanding the monetary base and providing additional stimulus.