Czech central bank keeps interest rate low, defying ECB

Petr Holub
5. 8. 2011 13:46
Low interest rates help exporters but discourage private savers
Czech National Bank - the central bank of the Czech Republic
Czech National Bank - the central bank of the Czech Republic | Foto: Reuters

Prague - The council of the Czech National Bank (CNB), the Czech Republic's central bank, decided that the base interest rate will remain at 0.75 percent. The decision is cheered by Czech industrial companies, which will not have to pay higher interest for the loans they need to finance their exports.

Czech Finance Minister Miroslav Kalousek has all reasons to welcome the decision as well - the Czech government will not have to pay higher interest to its creditors.

However, the Czech central bank's decision, aimed at helping Czech firms and the state budget,  also implies that the bank's management does not expect the Czech economy to recover very soon.

Believing there is no real threat of inflation, the bank's management has decided to protect exporters. The bank as well as the government hopes that the export will help maintain the economic growth rate above 2 percent even next year.

Read more: Czech bank's profit drops due to Greek debt crisis
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Also, the Czech central bank's strategy is in sharp contrast with the approach of the European Central Bank (ECB), which has increased the basic interest rate three times in the last ten months, out of fear of inflation. The current rate is 1.5 percent, double the Czech basic interest rate.

Analyst David Marek from Patria, an investment bank, points out that Switzerland's and Japan's central banks have even decreased their base interest rates this week. However, these countries are in a different position, as investors are panicking over the debt problems in the USA and euro-zone, and are seeing the yen and frank as safe haven. In the last six months, the frank increased 20 percent against the euro and dollar, the yen increased 10 percent. A too-strong currency is a threat to both export-oriented economies.

Bad news for savers

However, low interest rates have also other effect - they punish savers. That's why Andreas Treichl, chairman of Austria's Erste, had asked the Czech central bank's council to increase the base rate. Erste Bank owns Česká spořitelna (Czech saving bank), one of the largest banking institution in the Czech Republic.

In an interview with Hospodářské noviny, a Czech business-oriented daily, Treichl warned that a low base interest rate forces banks to offer minimal interest rates to savers - one percent a year. In this way, the savings of citizens are losing their value due to inflation. This year, they will lose one percent of their deposits, and next year, according to the estimate of the Czech central bank, they will lose two percent.

One of the effects of the low interest rates is that people stop saving. In 2008 and 2009, the amount of money deposited in banks by Czech citizens grew every year by CZK 150bil. In 2010, it was only 65bil. In the first six months of 2011, the deposits increased only by 42bil.

Treichl believes that if the interest rates were higher, citizens would start to save again.

At the same time, Czech citizens borrow less.

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