Interests rates hit bottom, likely to rise

27-10-2003

The Czech Republic has been enjoying extremely low interest rates with the consequent credit boom. This is due to virtually non-existent inflation but analysts warn that things may change soon.

Leading Czech economic analysts believe that the Czech central bank has finished slashing interest rates and will likely pull them higher some time next year to pre-empt inflation.

All the economists surveyed recently predicted that Czech monetary policy makers would leave the key two-week repo rate on hold at an all-time low of 2.00 percent for the time being, but the repo rate is seen bottoming out at this level after a nearly two-year easing cycle. The rate cut series that started in November 2001 has brought short-term costs of borrowing in the Czech Republic in line with those in the euro zone.

Czechs have enjoyed the lowest interest rates and lowest inflation among the four central European countries due to join the European Union in May next year. However, the Czech central bank and private-sector analysts have predicted a sharp rebound in price growth in the coming months, largely on the back of indirect tax hikes related to the EU entry.

In its most recent July forecast, the Czech National Bank saw inflation between 2.5 and 3.9 percent at the end of 2004, up from zero in September. The bank's policy makers will review the prediction on October 31 and could adjust interest rates if they feel any need to do so. The analysts agreed though that a rate hike is at least several months away.