Virus Triggers Czech Rate Cut to Kick Off Easing in Eastern EU

(Bloomberg) --

The Czech Republic staged an emergency interest-rate cut to counter the impact of the coronavirus, reversing a February hike as central banks across the region prepare for monetary easing.

Policy makers slashed the benchmark by a half point to 1.75% at an extraordinary meeting in Prague on Monday. Governor Jiri Rusnok said the bank was ready to cut further as well as to react to any excessive moves in the koruna, if needed. While the full impact of the virus on the economy still wasn’t clear, inflation would slow dramatically from earlier projections, he said.

“It’s clear that there will be sharp cooling of the economy,” Rusnok told reporters. “We are very strongly convinced that our decision is going in the right direction.”

It was an about face for a central bank that had raised rates nine times since 2017 in one of the most aggressive tightening drives globally. It also comes as policy makers around the world scramble to shield an economy cast into uncertainty as nations impose measures that upend lives and threaten trade, jobs and company earnings.

Governments across the European Union’s eastern wing are opening up their coffers to counter the slowdown as shops, factories, restaurants and all manner of enterprises shut down under quarantine measures. Central banks are reacting too.

Serbia, which is an EU candidate, cut rates last week. And after Sunday’s emergency easing at the U.S. Federal Reserve, Polish policy maker Jerzy Zyzynski said his board is inclined to consider cutting by more than a quarter point from a record-low 1.5%. Economists surveyed by Bloomberg predict a reduction of at least half a point as early as Tuesday, when Poland holds a non-rate meeting.

The government in Warsaw has also pledged to present a stimulus plan on Tuesday that may top 1% of gross domestic product. MPC member Grazyna Ancyparowicz said the fiscal stimulus should be announced before the central bank considers cutting.

“Absolutely nothing should be done by us without the government taking fiscal action first,” she said.

In Hungary, the central bank unveiled a moratorium on corporate loan payments while adjusting collateral rules for lenders, setting the stage for a potential liquidity boost of more than 2.5 trillion forint ($8 billion).

The koruna slumped 4.1% to 27.35 per euro, its weakest level since June 2015. Over the past 5 trading days, it has lost 6.5%, the most among 31 major currencies tracked by Bloomberg worldwide.

Rusnok said there’s no reason to correct the koruna’s moves for now. The bank said it would raise the frequency of its liquidity-providing repo operations. It also said that it expected banks to refrain from dividend payouts or steps that may jeopardize their resilience “until both acute and longer-term consequences of the new coronavirus epidemic fade away.”

”A further rate reduction can’t be ruled out,” said Radomir Jac, chief economist at Generali Investments CEE. “I personally believe the repo rate may stay at the current level of 1.75% for a longer period, thanks partly to a weaker koruna, which helps ease monetary conditions.”

--With assistance from Krystof Chamonikolas, Marton Eder, Zoe Schneeweiss, Radoslav Tomek and Dorota Bartyzel.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey, Andrea Dudik

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