Final Word from Tuesday, September 18, 2001
Decisions yesterday by the U.S. and European central banks to cut key interest rates by 0.50 percentage points are putting the Czech National Bank in an uncomfortable position. Domestic economic indicators suggest that a rate increase might be needed soon, but recent international developments speak instead for a rate decrease. Even before the terrorist attack on the U.S., Finance Minister Jiří Rusnok had warned that a tendency to raise domestic rates at a time of falling international rates serves to increase the likelihood of an inflow of short-term speculative capital. After yesterday's rate cuts, the Czech interest-rate differential is now even greater. If the worlds economy goes into recession, the CR will be vulnerable from several angles. The unanswered question is when the CNB should shift from fighting inflation to fighting global recession.