Czech Central Bank Cuts Key Rate to Record-Low 1.25%

By Radoslav Tomek

Aug. 6 (Bloomberg) -- The Czech central bank cut its key interest rate a quarter-point to a record low to prop up the economy during the global financial crisis.

Policy makers trimmed the two-week repurchase rate to 1.25 percent from 1.5 percent at their meeting today in Prague, the central bank said in a statement today. The decision was predicted by eight of 17 economists surveyed by Bloomberg. The rest expected no change amid signs the recession in western Europe, the main Czech export market, is easing.

The strengthening koruna allowed for one more rate cut to bolster the economy, which is heading for its worst contraction in more than a decade, economists said. The move brings the combined reduction of borrowing costs since June last year to 2.5 percentage points.

“A weaker first quarter, a favorable inflation outlook, a new gloomier prognosis, an imperfectly functioning inter-bank market and a stronger koruna: these are the reasons why we marginally lean toward a cut,” Martin Lobotka, an economist at Ceska Sporitelna AS in Prague, said before the announcement.

The central bank joined its counterparts in Hungary and Romania, which also reduced borrowing costs in the past two weeks.

Koruna Steady

The koruna was trading at 25.966 against the euro at 1:01 p.m. in Prague, little changed from yesterday. The currency has lost about 2 percent since reaching an eight-month high of 25.464 against the euro on July 27 on speculation the central bank may cut rates today.

The central bank didn’t elaborate on the decision. It will hold a press conference at 3:30 p.m. in Prague where it is scheduled to unveil its new outlook for the economy, which will probably show the economy will shrink more this year than the 2.4 percent estimate of three months ago.

The last forecast also projected an inflation rate at 1.1 percent in the second quarter of next year and at 1.7 percent in the third quarter of 2010.

The rate fell to 1.2 percent in June, the lowest in more than five years, from 1.3 percent in the previous month as the economy’s decline damped price pressures. The rate remains below the central bank’s target of 3 percent, plus-minus 1 percentage point.

To contact the reporter on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net.