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Czech central bank keeps key lending rate at 2.5% as expected

The Czech two-week repurchase rate remained at 2.5%, the world's third-lowest, as monetary policy makers wait for signs of accelerating price growth.

The central bank today refrained from changing rates for a fifth month, spokeswoman Pavlina Bolfova said on the bank's Web site. The decision was in line with a forecast of all 15 economists in a Bloomberg survey. The central bank will comment on the decision at a 3:30 p.m. press conference in Prague. The koruna's gains during the Q4 pushed inflation below the central bank's target of 3%, easing the need to raise rates. Policy makers slashed their inflation outlook last month, suggesting stable borrowing costs in coming months and a gradual increase as consumer demand picks up and excise taxes are raised. „Inflation deep below the target and a series of uncertainties are forcing the central bank to wait,” said Petr Sklenar, an economist at Atlantik Financial Markets in Prague, before the announcement. „The koruna will have a say in the timing” of rate increases that should come in the H2. The inflation rate fell to 1.3% in January from 1.7% in December, and was 0.2-0.3 percentage points lower than the central bank's projection. That has diminished chances the central bankers will restrict borrowing any time soon. Only Japan and Switzerland have lower interest rates than the Czech Republic. The bank's target for inflation is set at 3%, plus or minus one percentage point.

Recent speculation about a rate cut, sparked by some central bankers' comments, evaporated after the koruna lost 2.7% against the euro so far this year, erasing almost all the gains from the Q4 of 2006. The koruna slid below the level assumed by the central bank's January inflation forecast, now representing a risk that future price growth may exceed the bank's average expectations for 3.1% at the end of the year and 3.5% in June 2008. The currency traded at 28.24 per euro by 12:13 p.m. in Prague, compared with 28.24 yesterday. Central bank Deputy Governor Miroslav Singer said on February 9 he expects a „long period” of stable interest rates which does not rule out some short-term swings. He said uncertainties such as the koruna, fiscal policy, food prices and a new consumer basket used for calculating inflation makes the bank's decision tougher than usual. „It seems to me that the rate of uncertainty this time is somewhat bigger, which paradoxically implies a long period of stable interest rates,” Singer said. „I can imagine a swing in any direction but at the same time I can imagine that such a swing will be only transitory.”

The repo rate is a percentage point below the key rate in the 13 euro-sharing countries, and that gap is seen widening in the Q1 as the European Central Bank has signaled it will raise its benchmark rate to 3.75% on March 8. That could bring the koruna under another pressure to depreciate and spur additional price growth, economists said. The current outlook for a pickup of inflation will probably prompt a rate increase as early as in July and no later than October, economists said. Rates will rise by a quarter percentage point in July and October, according to Atlantik's Sklenar and David Navratil, an economist at Ceska Sporitelna AS in Prague. (Bloomberg)