Central Bank cuts interest rates in response to strengthening crown

26-07-2002

On Thursday, the Czech National Bank's board made money cheaper by reducing interest rates by three-quarters of a percentage point. This measure was welcomed by the Finance Ministry, as the cut is expected to curb the recent rise of the crown and come to the rescue of exporters who have been under enormous pressure to reduce costs. Although a cut in interest rates was expected, most economic analysts predicted they would be cut by half a percentage point at most. Dita Asiedu spoke to economic analyst David Marek from Patria Finance to find out what this move meant for the business community and in what way it would affect the average Czech:

Interest rates 1991 - 2002, graph: CTKInterest rates 1991 - 2002, graph: CTK "Lower interest rates mean lower payments of loans and cheaper mortgage loans so it's possible for people to borrow money cheaper than before. The second way is the effect on savings. At the moment, people are not very interested in saving because interest rates from their accounts in banks are very small."

What about the corporate sphere?

"For firms in the Czech Republic, it is important that our interest rates enable cheaper financing of investment plans or of ordinary payments of Czech firms so it's possible for them to borrow money from banks cheaper and to have lower costs of financing and running their businesses."

Will it also help exporters who have been complaining about the strong crown?

"The possibility of lower costs is one of the measures that should partly offset the negative impact of the strong crown on the sales denominated in crowns."

Now, one of the reasons for the interest rate cut was the appreciation of the Czech crown. How has the crown reacted to the move?

"The Czech currency slightly depreciated immediately after the announcement of the lowering of the interest rate. But it's possible that not only this measure but also some of the orders for the Czech National Bank of the foreign exchange market could somewhat depreciate the Czech currency."

The interest rates are now below the Euro-zone level. What are the implications of this?

"I wouldn't expect any strong implication because investment to the Czech Republic that is motivated by a positive interest rate differential was quite small. So, we could see that foreign direct investment especially was by far the most important part of the balance of payments. So the current situation of the lower interest rates in the Czech Republic compared to ECB rates is not an important factor."

26-07-2002