By Sean Carney (Dow Jones, 20.3.2013)
As risks mount that the Czech economy could fall into a deflationary spiral, the chief of the country's central bank said he is weighing intervention in foreign-exchange markets as an option to weaken the local currency and keep prices from dropping.
The Czech National Bank is determined to "stop, decrease or eliminate the risk of significantly undershooting our inflation target," said Gov. Miroslav Singer, because undershooting could "obviously start processes that are very difficult to cope with later."
For the last 18 months, the Czech economy has been shrinking--its longest contraction in decades, as two years of government austerity measures, weak demand for the country's exports and Europe's uncertain economic climate deter spending and investment.
The central bank has cut interest rates to near zero. To further ease monetary conditions, it is considering selling Czech koruna to drive down the currency's value. Such a move would raise prices of imported goods and also encourage people to spend rather than see the value of their savings decline.
If the central bank does intervene, "it's because we exhausted our interest rate tool and we want to keep up with the mandate which is to keep prices stable," Mr. Singer said. Mr. Singer previously said any move would likely be in the second half of the year.
Consumer-price inflation was 1.7% year-on-year in February, down from 1.9% in January. That's still within the central bank's target range of 1% to 3%.
But when factors such as sales tax increases and energy and food costs are stripped out, prices in February were actually falling 0.4% year-on-year, according to calculations by Daniel Hewitt, an analyst at Barclays in London.
"The case for further loosening of monetary policy is compelling," Mr. Hewitt said, adding that inflation shows considerable downward momentum.
In Governor Singer's view, current signals are "probably pointing more in a less-inflationary scenario" regarding demand, though "the latest price signals, if I remember them correctly, are higher." He said he is still considering what steps he'll propose, if any, at the next meeting of rate-setters on March 28.
Mr. Singer said price stability in the domestic economy is critical, because if prices fall, it would initiate risks the central bank is not well equipped to cope with.
"These risks could strengthen the picture...that some prices may go down for a very prolonged period," Mr. Singer said. That in turn, could prompt people to defer spending "because of uncertainty, which obviously is a phenomenon here," and also because they could expect prices to be lower in the future.
"That would further enforce the deflationary risks," Mr. Singer said.
Central bankers have also discussed other less conventional options, such as sending checks or giving vouchers to households in an effort to boost domestic economic activity.
"If we would exhaust the exchange rate tool, and we don't see how it could be really exhausted in an economy like this, we'd probably start discussing even less conventional measures. But we are definitely not considering using them now," Mr. Singer said.
Mr. Singer's colleagues earlier this week said they don't see an acute need for an intervention in foreign-exchange markets. Vice-governor Mojmir Hampl said deflation would be the spark, while fellow rate-setter Kamil Janacek said only a serious threat to price stability would be cause for intervention.
At least four of the seven members on the bank's monetary policy council would need to approve of any intervention. If the bank does intervene, the monetary policy board would decide what foreign-exchange level it deems appropriate to ease monetary conditions.
"I doubt we'll communicate the level with markets, we'll simply do the interventions and ask our traders to try to be as close as possible to the level that we deem appropriate from meeting to meeting," Mr. Singer said. "But there's nothing like a defended exchange rate. There's nothing like this in my mind."
Last September, before Mr. Singer introduced the possibility of intervention, the koruna reached nearly 24.30 to the euro, which made Czech exports more expensive and weighed on the already-struggling economy.
Last November, the bank started a series of verbal warnings that it would step in if the koruna appreciated too much. Late Wednesday the koruna was at 25.70 to the euro.
Czech Central Bank Governor Miroslav Singer
Sean Carney (blogs.wsj.com, 20.3.2013)
In an interview with The Wall Street Journal, Czech National Bank governor Miroslav Singer talked about the nation’s skeptical views on the economy, the risk of deflation, how a foreign-exchange intervention would look, as well as his views on current events in Europe.
The Czech economy has been contracting for the last six quarters and the central bank has cut its benchmark rate to 0.05%. The next step to ease monetary conditions is a currency intervention, and the next monetary policy decision is on March 28.
WSJ: What would be the trigger for the central bank to intervene on foreign-exchange markets?
Mr. Singer: If we do intervene, it’s because we’ve exhausted our interest rate tool and we want to keep up with the mandate which is to keep prices stable. We are not here to keep up competitiveness, which is by the way obviously pretty reasonable. We are here to potentially stop, decrease or eliminate the risk of significantly undershooting our inflation target. Because that may obviously start processes that are very difficult to cope with later.
Do you see signs of deflation?
Well, at this particular moment the signals are probably pointing more in a less-inflationary scenario, or at least the demand signal. But the price signals, the latest price signals if I remember them correctly, are higher. Moreover, I will make up my mind in the coming week before the monetary policy decision comes out.
Are you concerned about deflation?
I’m trying to tell you that I think about this phenomenon.
Do you think an intervention will be necessary?
I will vote for it if I’m afraid of undershooting the price stability mandate. If we failed to pay close attention to our price stability mandate, we would initiate all sorts of risks we are not well equipped to cope with, meaning of course the risk of slipping into deflationary scenarios.
What sort of risks?
These risks could strengthen the picture in agents of the economy that some prices may go down for a very prolonged period. So [people may think] it’s not only worthwhile to wait because of uncertainty, which obviously is a phenomenon here, but also worthwhile to wait with spending or investment because–we’re not only talking about consumers– of speculation that the price of what you want to purchase will be lower next time. And that would further enforce the deflationary risks.
Are you comfortable with intervening?
Generally speaking, I’m not that happy to be in a situation in which we’ve reached a technical zero. And my general feeling about it really doesn’t matter. We must vote how we feel we must vote. So it’s of no merit to the decision.
Are you thinking about helicoptering money to households to boost demand?
As a practical move, no. We’ve discussed what we’d do once or twice, given that liquidity problems are not there, we’ve said and communicated if we would exhaust the exchange rate tool, and we don’t see how it could be really exhausted in an economy like this, and we’d probably start discussing even less conventional measures. But we are definitely not considering using them now.
Is there a particular foreign exchange rate you are aiming for?
I don’t think we have any particular level in mind. We are thinking that we may be forced to use the exchange rate as an additional tool for [monetary] easing, not for defending a particular exchange rate.
How would the central bank do it?
That means that from [monetary policy] decision to decision the [foreign-exchange] level that we deem appropriate may be developing. I doubt we’ll communicate the level with markets, we’ll simply ask our traders to carry out interventions. That’s my guess how we [would] do it. We’ll ask our traders to try to be as close to the level that we deem appropriate from meeting to meeting. But there’s nothing like a defended exchange rate. There’s nothing like this in my mind.
The Czech recession is driven largely by a drop in consumer activity. Is it realistic to ask people to resume spending?
Given that people save more, according to statistics, their total incomes should be higher, they definitely have enough money. It’s meaningful [to ask for people to spend].
If we would see deposits of people slowing down or declining…then I would start having doubts what could be achieved. But at this particular moment, it’s quite obvious that the money is there.
Are people saving to pay off debts rather than to purchase something?
The population is not overly in debt, the statistics are OK, people are just skeptical.
What is your view of the euro zone’s handling of the Cypriot situation?
We are at the peak of the problem and I don’t think I’d help the situation by making any sorts of comments about the behavior of authorities which are discussing it with the power to decide and change the situation.
Is there a risk to the Czech economy from Cyprus or the country exiting the euro zone?
No. There’s no direct risk at all. We could be harmed by the spreading out of the crisis or by the crisis catching up with different economies. But the direct interlink between this economy and Cyprus is negligible if there’s any that could be seen.
The central bank has said it expects an economic recovery to start in the second half of this year. Do you still agree with that?
I have many reasons to believe that next year should be better than this year and that we’re at the bottom of the business cycle. How long we’re going to stay at the bottom is less clear, obviously with a crisis of that size. But given lot of factors I’m relatively optimistic about next year and I think we are probably very close to the kind of real down point.