By Andrea Dudikova and Peter Laca (Bloomberg 20.10.2009)
The Czech central bank should further loosen monetary policy as inflation may be significantly below its target next year, Vice-Governor Miroslav Singer said.
The bank has “several tools” available to ease conditions, Singer said in an interview in Prague yesterday. He declined to elaborate or say whether an interest-rate cut is on the cards at the next rate-setting meeting on Nov. 5.
“There are several signals suggesting monetary conditions could be looser,” he said. “Otherwise, there is a risk of a rather significant undershooting of the inflation target relevant for our decision-making.”
Singer and Governor Zdenek Tuma were outvoted 5-2 on Sept.
24 in their call for a quarter-point reduction of the benchmark rate to a record low 1 percent, with the majority of their colleagues questioning the impact on the koruna and price growth. The koruna has gained 7.1 percent in the last six months and traded at 25.729 against the euro as of 10:26 a.m. in Prague.
Apart from setting interest rates, central banks can buy or sell currency or take measures to regulate liquidity on the local money markets. Comments by Tuma in July 2008 that rates may be cut to halt the koruna’s advance knocked 1.7 percent off the currency, its biggest one-day move in four years.
‘Decline Significantly’
Economic reports suggest inflation “will decline rather significantly,” especially the gauge “relevant for monetary policy,” Singer said, referring to the adjusted consumer price measure that excludes one-off effects such as increased indirect taxes in following inflation next year.
In September, the inflation rate was zero, while the central bank expected 0.5 percent. Industrial producer prices fell a record 5.4 percent in September.
As most of the news since September was anti-inflationary, “we see it as logical that Singer is keeping his view that monetary policy should be loosened further,” said Radomir Jac, chief economist at Generali PPF Asset Management in Prague. “I now believe that the central bank will indeed cut its key rate to 1 percent in November. At the same time I do not expect them to directly intervene against the koruna.”
Jac is one of five economists surveyed by Bloomberg who expect a lowering of interest rates on Nov. 5. Nine others see no change.
Lowering Trend
The European Union’s eastern members have followed their counterparts globally in cutting rates to soften the impact of recessions while keeping a close eye on inflation in order to ultimately meet terms to adopt the euro.
The Czech central bank expects the economy to contract 3.8 percent this year before returning to moderate growth next year.
The bank will present its new forecast in November.
The bank’s staff expects inflation to quicken in 2010 because of the government’s package of deficit-cutting measures, which include increases in value-added and excise taxes.
The inflationary impact of the changes will be less than initially calculated, Singer said, noting the bank expected the inflation rate to rise above 3 percent next year, according to preliminary calculations. As of January, the bank will have a new 2 percent mid-range inflation target compared with 3 percent now.
“It seems to me that the impact on headline inflation may not be as dramatic as suggested by the initial calculations, and it appears to me that inflation expectations will remain very conservative,” he said.