Reuters: US Dollar Report: UPDATE 1-Czech c.bank keeps rates near zero, focus on FX comments

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UPDATE 1-Czech c.bank keeps rates near zero, focus on FX comments Mar 28th 2013, 12:08 Thu Mar 28, 2013 8:08am EDT * Czech cbank keeps rates flat, eyes on intervention talk * Governor Singer to hold afternoon news conference * Crown weakening has helped stay bank's hand on interventions By Jana Mlcochova and Robert Muller PRAGUE, March 28 (Reuters) - The Czech central bank (CNB) kept interest rates unchanged near zero on Thursday and investors will watch to see if it uses an afternoon news conference to outline its latest thinking on the possibility of interventions to weaken the crown. Having cut the key two-week repo rate to 0.05 percent in November, the bank has said it can go no lower and will start selling crowns if it needs to ease further to fend off deflationary pressures. But crown weakening in the past weeks, partially triggered by the Cyprus crisis, has dampened the need. Governor Miroslav Singer will hold a news conference at 1330 GMT. The Czech Republic is struggling to come out of its longest recession in two decades, and inflation is undershooting the central bank's inflation target while a budget squeeze by the centre-right government is hitting consumption. Policymakers across central Europe have been cutting interest rates to bolster their economies that are closely linked with the crisis-hit euro zone. The Czech bank has said it would keep rates at the bottom for an extended period until it sees significant inflation pressures. Regional peer Hungary cut interest rates to a record low of 5 percent on Tuesday. Romania's central bank kept rates on hold at its meeting on Thursday. EASING CROWN Weakening the crown would raise import prices, a quick way to raise inflation. It would also cheapen Czech exports, which equal 80 percent of the country's output, boosting profits. That should theoretically make companies start investing and taking on more staff, cutting down the record high unemployment and bolstering consumption. A series of verbal threats by the central bank to sell the crown, along with poor economic data and elevated risk aversion after the Cyprus rescue deal, have however pushed the currency below the bank's expectations and reduced the urgency for interventions. The unit traded at 25.75 on Thursday morning, below the average rate of 25.5 seen by the central bank in the first quarter and 2 percent weaker from Feb. 7, a day after the bank's last policy meeting after which Governor Singer said interventions looked less urgent. Since that meeting, Singer has said interventions may still be needed in the second half of this year, and that he would support crown sales if he were "afraid of undershooting the (bank's) price stability mandate". Board member Kamil Janacek said only significant exchange rate fluctuations or "a serious risk to fulfilling the central bank's legal mandate of price stability" would justify interventions. The bank has defined its mandate of preserving price stability by keeping price growth at 2 percent, with a tolerance band of 1 percentage point either side of that target. Inflation slowed to 1.7 percent in February, a second straight reading below the target but still well within the tolerance band. However, February was the fourth straight month where actual inflation has been below forecasts of the central bank whose latest official projections saw price growth slowing below target only at the beginning of 2014. A Reuters poll of 21 economists showed the number of economists predicting interventions had halved from February. Link this Share this Digg this Email Reprints

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