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European policy makers told EU accession states not to hurry with entering the exchange rate mechanism, a step required before euro adoption. The government has agreed to reduce the basic Value Added Tax rate from 22 to 19 percent. Central Bank has left interest rates intact for the time being but signalled hikes on the way.

Business News

Candidates advised not to haste euro adoption

Photo: European Commission

At an international conference in Prague this week, European policy makers told EU accession states not to hurry with entering the exchange rate mechanism, a step required before euro adoption. At a euro adoption conference in Prague, representatives of the European Central Bank and the European Commission spoke in favour of making sure that the candidates first reduce budget deficits and ensure economic stability before they make other steps toward adopting the euro. Candidates must fulfil formal criteria on inflation, debt, budget gaps, interest rates and exchange rate fluctuation as well as focus on lasting stability and convergence of wealth levels with the richer western Europe. A necessary step on the path to the single currency is to spend at least two years in the confines of the ERM-2 Exchange Rate Mechanism, a +/- 15 percent currency fluctuation band against the euro.

Govt approves more VAT changes

The government has agreed on further changes in the Value Added Tax (VAT). The biggest change is the reduction of the 22-percent basic rate to 19 percent. However, selected items will be moved from the lower rate of 5 percent to the higher bracket on May 1. It is the biggest tax change in the country in a decade. The government hopes to raise an extra 17 billion crowns annually, using it primarily for higher welfare payments to poorer families with children. Analysts have warned that the VAT reduction may not translate into lower prices as retailers usually do not project a tax cut in prices at once but let profits grow instead.

Central Bank leaves rates intact but signals hikes on way

At its latest policy meeting, the Czech National Bank board left interest rates unchanged but sent a strong signal that a tightening is on the way in connection with higher inflation forecasts. Markets had expected the decision to hold rates for the sixth consecutive month, after nearly two-years of easing which brought interest rates down on par with the main rate in the euro zone. The key two-week repo rate stands at an historic low of 2.0 percent. The Czech National Bank slightly upped its inflation outlook for the next 12-18 months to between 2.6 and 4.0 percent by the end of this year before price growth eases to 1.8-3.2 percent in June 2005. CNB Governor Zdenek Tuma told reporters that if the rise does occur, the bank expects rates to rise in the second half.