David Barwick(finance.cz 21.8.2007, Zpravodajství ČTK)
PRAGUE (MNI) - The turmoil on global financial markets requires no monetary policy response from the Czech National Bank at this point, CNB Zdenek Tuma said Monday.
Speaking to Market News International, Tuma said the country's currency, the crown, reflected the country's economic fundamentals, which point to robust, well-balanced growth in coming years.
While headline inflation should accelerate in the short term due to higher indirect taxes, core rates would continue to show little underlying pressure, even if wage developments pose an upside risk and inflation expectations might rise with the headline rate, he said.
The central bank is still assessing the implications of the latest market turbulence, but "if something happens in the global economy, this will influence the Czech economy and monetary policy," he said.
The most direct potential impact would be on the domestic financial sector, Tuma explained.
"From this point of view, I am quite optimistic, because it doesn't seem to me that current problems on foreign markets would threaten the stability of the Czech financial sector," he said. "We haven't found any signals in this direction."
Shocks to the global economy or trade partners would also affect an open economy, he continued. But it is too soon to reach a conclusion about the possible domestic fallout of global market turbulence for the Czech economy, he said.
"At this moment I don't see any significant impact on the Czech economy on such a scale that monetary policy should respond," he said.
Tuma played down the potential impact on foreign investment of a repricing of risks, saying that the Czech crown was seen "as a quite credible and stable currency" and that it was "not clear that the Czech Republic is perceived as a risky country."
"So even if risk is repriced, I don't think that it could lead to a sudden change in monetary policy," he asserted.
As to recent foreign exchange volatility, it would have to be seen how much of this was merely market turbulence, he said. In general, the crown reflects economic fundamentals given the Czech economy's good performance, he noted.
Tuma brushed aside the potential for domestic liquidity problems, affirming instead that "there is too much liquidity on the Czech market."
The CNB last hiked its the two-week repo rate by 25 basis points in July to 3.0%, the highest level in nearly five years. The central bank's outlook for rising inflation points to further tightening ahead.
There would be "no strong conclusions" for CNB monetary policy if the European Central Bank were to delay the imminent rate hike it had signalled in early August, Tuma said. Interest rate differentials are "important, but not the driving force" for Czech policy, which he stressed did not follow that of the ECB.
While domestic inflation slowed more than expected in July to 2.3% from 2.5% in June, this is not a compelling argument for the CNB to alter its tightening bias, as monetary policy must consider medium-term price trends and take a forward-looking approach, he stressed.
"Our last forecast indicated inflation would be going up and that's why we increased our interest rates and that's why we said that our inflation forecast is consistent with a growing interest rate trajectory," he said. "Obviously the interest rate trajectory is very much dependent on how various risks develop in coming months."
It is "very likely" inflation will surpass 3% within a few months and then stabilize, Tuma asserted. However, core inflation should only "grow very moderately, so in the end it should not imply inflationary pressures" over the medium term. But some uncertainty remains as regards the government's fiscal policy, he noted.
It is crucial that inflation expectations remain well anchored, he said. A sudden change in headline inflation as result of indirect tax hikes could affect expectations, he said.
The central bank had considered a steeper hike in the two-week repo in July, Tuma noted. "There were relatively strong arguments for a 50-bp hike, but on the other hand some members of the board believed it could be perceived as a response to a shock."
"It was argued that this is not a response to a shock, so that a smoother response by monetary policy would be appropriate, so that's why in the end the opinion that 25 bps was appropriate prevailed."
Asked about the outcome of the policy-setting meeting on August 30, Tuma said it was unlikely the CNB would raise rates by 50 bps. He declined to predict the pace and timing of policy moves beyond that, except to remind that the bank's inflation forecast was consistent with increasing interest rates.
Tuma made clear that he was more concerned about future wage trends than inflationary implications of robust household consumption, since the latter had once before been the mainstay of economic growth, followed by fixed investment, then net exports and now household consumption again.
"Over the recent years, economic growth has been more or less balanced. So the fact that household consumption has been relatively strong at this moment -- obviously it's significant for understanding the economy, but I wouldn't draw any strong implications," he said.
Wages, however, are "always important," he continued. They had tended to evolve appropriately for economic developments in the past, but the outcome of current wage negotiations is less certain.
"At this moment it seems that wage pressures are mounting, and it's associated with strong economic growth," he said. "So we will see whether wages will remain appropriate as they were in previous years."
Market expectations -- generally calling for another rate hike no later than September -- should never be the "driving force" of monetary policy, even if they are interesting too observe, Tuma said.
"It's certainly not beneficial for monetary policy to surprise markets too often," he said. "Nevertheless ... from time to time it can happen."
Turning to growth, Tuma said, "We remain quite optimistic. We expect a moderate slowdown from levels above 6% to levels below 6% through 2008."
As for 2009, he said, "I am quite optimistic, because I consider economic growth as balanced without obvious bottlenecks, so that I can imagine the Czech economy will continue to perform well beyond the horizon of 2008."
Upside and downside risks to the economic outlook are "quite symmetrical," he said, citing labor market developments, government policies, abrupt foreign exchange moves and volatility, as well as the current general market turmoil.
While uncertainties have risen in the last two months due to external factors, Tuma said, "I believe this economy can remain a low-inflation economy with solid economic growth."