Czech central bank cuts rate to record low 0.05%

The Czech central bank CNB cut its key two-week interest rate by 0.2 percentage points to 0.05 percent on Thursday, the lowest level since the country became independent in 1993. "The CNB board decided to cut its two-week repo rate by 20 basis points to a record low of 0.05 percent", from Friday, the bank said in a statement. It also slashed the overnight Lombard rate by 0.5 percentage points to 0.25 percent and the overnight discount rate by 0.05 percentage points to 0.05 percent. The bank announced the cut an hour later than usual without explaining why. Analysts polled by the CTK news agency had expected the cut as the export-dependent Czech economy -- strongly linked to neighbour and EU powerhouse Germany -- slipped into recession early this year. But Michal Brozka, chief analyst with the Prague branch of Austria's Raiffeisenbank, also said the cut would have a negligible effect on the economy. "The market will now focus on statements from CNB board members who have mentioned the possibility of non-standard steps -- forex intervention in particular," he added. The bank is due to hold a press conference at 14:30 GMT. Neil Shearing, chief emerging market economist at London-based Capital Economics, labelled the cut as a surprise, adding that the delay in the announcement "could be a sign that the decision was carried by the narrowest of majorities." He said: "Alternatively, it might suggest the board is treading very carefully with regards to its communication of what might happen next, and in particular to the possibility of a move towards unconventional policy easing." He commented that further non-standard steps were likely. "With the economy mired in recession and the government wedded to fiscal austerity, monetary policy will have to provide the maximum possible support," he said. "But at the same time, a move towards unconventional measures may not happen quickly – despite today’s decision, the CNB remains a highly conservative institution," added Shearing. The bank last changed rates at the end of September, when it cut the key rate by 25 basis points to 0.25 percent. The bank is also due to announce a new macroeconomic forecast later on Thursday. So far, it has forecast that the economy will contract by 0.9 percent this year before a pick-up in 2013, when growth of 0.8 percent is expected. In 2011, the Czech Republic -- an EU member since 2004 which is yet to join the eurozone -- posted economic growth of 1.7 percent. The finance ministry cut its economic growth forecasts for both 2012 and 2013 on Wednesday, predicting a 1.0-percent contraction this year and 0.7-percent growth in 2013. The forecast includes planned budget revenue from a proposed higher value added tax -- a move to be approved by parliament next week, which however threatens to topple the government. Prime Minister Petr Necas has said the vote is tantamount to a confidence motion, running the risk of a snap election as his government has lost a majority in parliament and is scrambling for support in talks with rebel lawmakers.