By Peter Laca (Bloomberg, 11.12.2012)
The Czech central bank shouldn’t rush to ease monetary policy further through koruna sales, board member Kamil Janacek said.
Moves to weaken the koruna are a “standard policy instrument” that the bank is ready to use if the economy requires, Janacek said in an interview today at the central bank’s headquarters in Prague.
“But right now, I’m in a wait-and-see position, and a further relaxation of monetary policy does not look imminent,”
said Janacek, who voted for two of this year’s three rate cuts.
“I have to wait and analyze the situation. Inflation trends in the first quarter of next year will be an important factor in this respect.”
The Ceska Narodni Banka is at a critical juncture following a cut in the benchmark interest rate to effectively zero last month after weakening domestic demand tamed inflation and pushed the country into its second recession since 2009. The bank said it may sell the koruna to further relax monetary conditions as the slump risks stretching into the longest ever.
The central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point less than the euro-area benchmark. Most Czech central bankers agree the main interest rate should be kept at this level until inflation risks rise significantly, according to minutes from the November meeting.
Weak Koruna
The koruna has lost 2.8 percent against the euro since Sept. 17, one day before Governor Miroslav Singer first said the bank may use koruna sales to ease monetary conditions. It is the second-worst performance among the 25 emerging-market currencies tracked by Bloomberg in the period. The koruna was unchanged from the previous close at 25.272 per euro as of 8:47 a.m. in Prague.
The economy is suffering from weak domestic demand as households and businesses cut spending due to government austerity programs and the euro-area debt crisis. Output shrank for a third three-month period from July to September, one quarter short of matching the longest decline ever.
Gross domestic product fell a quarterly 0.3 percent from April-June, compared with a revised 0.4 percent decline in the previous three months, the Statistics Office in Prague said Dec.
7. GDP contracted 1.3 percent from a year earlier, also a third straight decline and the worst reading since the end of 2009.
Prolonged Recession
With the risk of the recession stretching, Premier Petr Necas wants to ease the pace of austerity after next year to avoid the fate of European leaders who were ousted as they pushed measures that stunted economies from Romania to Spain.
“We expect trends in the domestic economy from this year to continue next year, especially in the first half,” said Janacek. “We forecast that there will be a shift from stagnation, or a slight recession, visible in the first half of the year, to a return of growth in the second half of 2013.”
Three main conditions are needed for this scenario to materialize, according to Janacek. They include a recovery in the Czech Republic’s main trading partners in Europe, increased household consumption and a renewal of corporate investments.
Inflation has been fueled mainly by the government’s tax increases this year, while the domestic economy isn’t creating any demand-driven inflation, according to Janacek.
“It’s quite evident that domestic demand, with a high probability, won’t represent an inflation threat in the next three or four quarters,” he said.
The central bank’s three rate cuts this year brought interest rates on corporate loans and mortgages to the lowest on record, while the policy decisions were also meant to have a psychological impact on households and businesses, Janacek said.
“This means that it’s a signal that the central bank, within its mandate of price stability, will try to improve economic conditions,” he said.
Czech Central Banker Janacek Doesn’t See Imminent Policy Easing
Further Czech central bank policy easing through koruna sales doesn’t appear imminent, board member Kamil Janacek said.
Janacek commented on economic developments and monetary policy outlook in an interview in Prague.
ON INFLATION AND MONETARY POLICY:
“Demand inflation pressures from the domestic economy are non-existent at present. For us, the main inflation threat would be a continued increase in agriculture commodities on world markets.
‘‘It’s quite evident that domestic demand, with a high probability, won’t represent an inflation threat in the next three or four quarters.
‘‘We cut the policy rates three times this year, which was followed by a decline in market interest rates. Interest rates for corporate loans and mortgages are at historic lows. The second dimension of our policy decisions was the psychological effect. This means a signal that the central bank, within its mandate of price stability, will try to improve economic conditions.
‘‘We are expecting a further slight decline in market interest rates, even though the policy rate is effectively zero.
It has been said already that we will be ready to use other instruments to achieve our goal.
‘‘I consider the foreign-exchange channel to be a standard policy tool, and I won’t have a problem if we use it, should the economic situation require further easing of monetary conditions. I believe that we will be ready to intervene if it’s needed.
‘‘But right now, I’m in a wait-and-see position, and a further relaxation of monetary policy does not look imminent. I have to wait and analyze the situation, inflation trends in the first quarter of next year will be an important factor in this respect.’’
ON ECONOMIC PERFORMANCE:
‘‘Net exports were the only factor slowing the decline in economic activity in the first three quarter of the year. The development of foreign demand for Czech exports will be very important for future performance of our economy.
‘‘We expect trends in the domestic economy from this year to continue next year, especially in the first half. We forecast that there will be a shift from stagnation, or a slight recession, visible in the first half of the year, into a recovery of growth in the second half of 2013.
‘‘This expectation is based on these three key
preconditions: that a recovery will occur in our main trading partners; that households will cease to defer consumption and will somewhat reduce the rate of their savings; and that companies will start to invest.
‘‘I think that when we see some improvement in overall economic situation, an improvement in perception among people and businesses will follow. The Czech economy, especially when compared with some other EU countries, is in a much better shape than how it’s perceived by the public and the corporate sector.’’