The Czech economy unexpectedly shrank in the third quarter, underpinning central bank concerns about deflation that prompted policy makers to start the first currency interventions in 11 years last week.
The Czech central bank kept interest rates at a record low for a 14th meeting as a weaker koruna prevented a decrease in borrowing costs and the euro area’s debt crisis prompted policy makers to cut the outlook for economic growth in 2012 to zero.
Czech sovereign debt issuance will likely peak this year and shrink to levels last seen before the global credit crisis by 2013, boosting the country’s bonds, as the new Czech government seeks to slash its fiscal deficit.
Czech inflation slowed in March and stayed below the central bank’s 2 percent target, adding to arguments for keeping interest rates record low even after the European Central Bank started monetary tightening last week.
Czech five-year yields tumbled to a record low after a two-notch rating upgrade by Standard & Poor’s boosted demand for the European Union member’s government bonds. The koruna strengthened against the euro and stocks rallied.
The Czech Republic sold its first euro-denominated bonds in more than a year as planned austerity measures and optimism about emerging-market debt sends the country’s borrowing costs below those in higher-rated Italy.