Czech central bank cuts interest rate to record 0.5%

    The Czech central bank cut its key policy rate by 25 basis points to a record low of 0.50 percent, as widely expected, to counter a weakening economy and declining inflation.

    “Both headline and monetary-policy relevant inflation will fall slightly below the target in 2013,” the Ceska Narodni Banka said in a statement, adding that four out of three board members voted in favor of the cut.

    “Developments in industrial production, construction output and retail sales in April indicated persistent weakness in economic activity.”

    The bank’s two-week repo rate was cut to 0.5 percent and the Lombard rate, it’s ceiling for short-term rates, was also cut by 25 basis points to 1.5 percent. The discount rate remains unchanged at 0.25 percent, the bank said, referring to rules that still use a multiple of the discount rate as basis for calculating penalties.

    "From the perspective of the spirit of the law the CNB deemed it justified to keep the sanction amounts above zero in such cases," the bank said.

    The central bank last eased monetary policy in May, 2010, when it lowered the repo rate by 25 basis points to 0.75 percent.

    But it cited growing downside risks, including weaker domestic activity, lower interest rates and oil prices and ongoing fiscal consolidation.

    In its statement, it compared the bank’s current forecast and consensus market expectations from June. This showed that economic growth (Gross Domestic Product) was now expected to ease to 1.4 percent for 2013, down from a forecast 1.6 percent. Growth this year was expected to rise by 0.6 percent compared with a previous forecast of 0.5 percent.

    Producer prices were expected to increase by 1.8 percent in 2013, down from a previous forecast of 2.1 percent, while consumer prices were expected to tick up to a rise of 2.1 percent from a previous forecast of 2.0 percent.

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