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Czechs cut rates to record low

  The Czech central bank cut interest rates by a quarter point to a historic low on Thursday to fight a severe recession in the EU state, but said the worst effects of the financial crisis on the economy had already past.  

The move brought the main two-week repo rate to 1.5%, stable at 50 basis points above euro zone’s main rate after the European Central bank also cut its key rate by the same amount.

The move was in line with analysts’ expectations that the flagging economy would prove to be a bigger concern than a weak Czech crown and reflected a downgrade to the bank’s economic outlook for 2009. It now forecasts the economy to contract by 2.4%, from a 0.3% fall previously.

“The weakening of the Czech economy is continuing, and this is the main reason why we decided to cut interest rates,” central bank Governor Zdenek Tuma told reporters. “The fact is that the economy has already registered the biggest blow and it is trying to somehow digest it. And I expect that in the coming quarters, the situation will be much better than it was at the end of last year and in the first quarter.” He said he could not predict the direction of the bank’s next move on rates but that economic risks were balanced.

Analysts are also split whether this was the last cut in the current easing cycle started in August, which saw the bank trim the cost of money by a cumulative 225 basis points.

He also said a recovery could start at the beginning of next year and the main shock to the economy appeared to be near an end, a statement possibly backed up by data released on Thursday by the Czechs and Hungary.

Both are suffering from a fall in euro zone demand for the cars and electronic products they produce.

However, the data showed bigger than expected trade surpluses in both countries and the 15.6% fall in Hungarian output in March, though a painful number, was far less dramatic than the 28.9% drop seen in February.

Analysts said the figures could be a first sign of improvement in the region, where an industry-led slowdown has bled into the rest of the economy, driving up job losses, hitting retailers, and causing banks to pull in the reins on lending.

“We also think that the worst could be behind us, that the economy is nearing the bottom,” said Jan Vejmelek, chief economist at Komercni Banka.

“We still expect a fall in the second quarter, but more mild... So I would agree that there could be a stabilization in the second half and moderate growth in 2010.”

Gross domestic product data for the Q1 is due out on May 15. The bank also cut its forecast for headline inflation to 1.4% for 2009, and Tuma said price growth would continue to decline but stay in positive figures.


The Czech crown weakened 0.3% to 26.62 versus the euro after Tuma’s statements, but dealers said some investors may have booked profits ahead of a long holiday weekend in the Czech Republic. Tuma said the currency would stabilize after clawing back some of its losses since the beginning of the year.

Analysts had said its weakness may have tempered the bank’s view on rates, because lower interest rates across the region have driven down currencies in the region by making them less attractive for investors. But the mood has calmed.

“There will be some correction of weakening and then stabilization,” Tuma said. “We should assume that it should be a certain reflexion of the calming down in sentiment surrounding central and Eastern Europe.”

The unit was 2.2% stronger from the last rate setting meeting on March 26 when it closed at 27.11 per euro. The central bank changed its forecast for the koruna’s rate, putting it at 26.6 versus the euro this year and 25.9 in 2010, from earlier forecasts of 25.8 and 25.6. (Reuters)