Interview of Oldřich Dědek, Bank Board member
By Krystof Chamonikolas (Bloomberg 28. 4. 2020)
The Czech Republic should lower interest rates as much as possible to help the export-oriented economy weather the damage being caused by the coronavirus pandemic, a central banker said.
As the country begins to ease some of Europe's earliest and strictest lockdown measures, policy makers are trying to mitigate the fallout. The government plans a record budget deficit to protect jobs and the Czech National Bank last month slashed borrowing costs by 1.25 percentage points to 1% -- more than anywhere else in the European Union.
The rate should eventually drop to a "technical zero," board member Oldrich Dedek said Monday in an interview. That's the term the central bank used when it held its benchmark at 0.05% between 2012 and 2017, before raising it nine times in two and a half years.
"We still have some room to lower rates and I think we should use it," Dedek said, without specifying a time frame. "As the government has come up with massive fiscal stimulus, I believe it would be right to support the effort by making company financing as cheap as possible."
Money markets are pricing in a half-point reduction in borrowing costs at the central bank's May 7 meeting. Investors are split about whether the benchmark will settle there or bottom out at 0.25% later this year.
The outlook for more rate cuts has boosted demand for the country's bonds, pushing shorter-term yields to a two-year low and helping the government borrow a record amount in late March and April.
Dedek opposes sub-zero rates because they could hurt banks' ability to provide credit. If they drop to zero and more easing is needed, he favors quantitative easing as a potential next step.
"That's a rather academic question for now," said Dedek, a 66-year-old economics professor and former deputy governor. "Now is not the time for QE action. This would only be relevant if the government's debt-servicing costs increased in some disproportionate way."
As local lenders are flooded with cash, the Czechs have so far avoided the type of asset purchases deployed in major economies and now being embraced by developing countries. But the central bank says it would consider following suit to smooth volatility.
Risks to the koruna, which has underperformed regional peers in the past two months, were the only potential curb on policy easing, according to Dedek. He said too much depreciation could harm consumption and undermine trust in the central bank, which pledges to curb excessive swings.
But even after more cuts, the Czechs would still maintain a premium over the euro area's negative rates, which could provide support for their currency.
"That's why I'm inclined to go all the way to technical zero," said Dedek.