Milda Seputyte, Marketa Fiserova (Bloomberg, 20.9.2006)
Miroslav Singer comments on his outlook for interest rates, the koruna and prospects for a delay of euro adoption beyond 2010.
Singer, 38, spoke in an interview during the International Monetary Fund annual meeting in Singapore today.
On an outlook for rates:
I do not think this time the decision will be that easy. We will have some bigger discussion over rates. It's for sure. I don't mind to hike and cut, it simply reflects that we are dealing according to new information or forecasts.
We are essentially at equilibrium where we'd like to be -- inflation is on the target. The hikes we expect in inflation are essentially caused by taxes and regulations.
We are sort of like if you are driving on a highway, you time to time do a slow adjustment left, a slow adjustment right but you are essentially on the highway.
On the koruna:
Essentially, the koruna is where we expected it to be this and past quarter. The forecast seems to be pretty much up to the point in terms of exchange rate now.
On whether economic data are in line with the July forecast:
We sort of expected other developments like domestic demand to pick up a bit more. Potentially in the future it will be the next driver. GDP and exports will play a lower role at least they won't keep improving on the pace we've seen previously.
On inflation:
We've been slightly surprised by inflation mainly due to food prices. Food prices are very erratic by nature. The inflation figures sort of signal that we've been right to hike the rates and again the discussion should be thorough whether to hike further or not.
The core inflation was slightly lower than we expected it to be, on the other hand, producer prices went higher than we expected.
Probably we might be seeing the first signs of demand picking up and potentially some inflation pressures may be signaled by the data.
Our decision is a bit about global environment here, the European Central Bank is hiking the rates. The period of very low rates is essentially over.
On the fiscal policy:
The budget is expansionary at the top of the cycle and this makes us obviously to do more on the interest rates, which is frankly not an optimal policy mix.
Foreign trade, foreign account, those are in a very good shape, but now the improvement has stabilized and maybe is starting to reverse. It's not the best time to raise rates because the economy may be potentially slightly overheating.
This is definitely not the time anybody would like to raise the rates. This is the time when you'd like to see more restrictive fiscal policy to be able to keep up the currency
exchange rate not so strong, which rates of course do, and to slow down the economy through the fiscal side.
This is definitely one of the factors why we might be raising the rates higher and sooner than we would otherwise do with a reasonable budget policy.
On the July 27 rate increase:
So far we made the decision that's justifying itself. I'm always ready to change my mind. I think we made a good decision last time.
We are a small economy and we have to move rates more often. So it's not a surprise if we time to time change the rates and then cut them. And it shouldn't surprise the market.
On the euro adoption date and signals it will be postponed beyond 2010@
It's a very realistic approach to the euro'' to delay the adoption. I'm not happy about the reasons that are behind this. I'm not happy about the budget and the reforms that have been
postponed. We are making a right decision to postpone but what we are doing budget-wise or reform-wise is not good.
This is not only slowing down the euro, which after all should be relatively less of concern, but it's slowing down the economy.
On the post-election deadlock and its impact on the economy:
The economy is essentially in a good shape. We've chosen the best time for a political deadlock, economically speaking. Yet it doesn't mean it could go on forever.
I don't want to see the best years for reform or for the budget improvement being wasted. If we can solve the political problems in a couple of quarters and go for a more ambitious pace in budgetary and fiscal reforms.
But if we don't, in two or three years, we may find ourselves in a very uncomfortable position.