By Sean Carney (Dow Jones 10.12.2012)
Czech foreign-exchange intervention to weaken the koruna may come in mid-2013 and the central bank's near-zero interest rates may remain until late 2014 as no inflationary pressures can be seen, a central banker said Monday.
In an interview, Lubomir Lizal, a member of the bank's monetary policy board, said the central bank's record-low benchmark interest rate of 0.05% will remain in place until inflationary pressures emerge.
When asked if he sees any inflationary risks at present, he simply said "no."
When asked how long rates can remain near zero, he said "I'd rather target conditions and not periods of time."
In the central bank's own forecasts, which span a period of 18 months, there are no indications of any rising pressures on consumer prices, he said.
The country's headline inflation rate was above the central bank's 1% to 3% target range in the first 10 months of the year, but that was largely due to increases in value-added taxes that took effect in January.
Monetary policy-relevant inflation, which looks at prices that can be influenced by monetary policy, has been in the lower end of the target inflation range all year, taking pressure off rate-setters.
The Czech economy has been in recession since late 2011, as domestic demand tumbled amid falling real wages, tax hike-fueled inflation, rising unemployment, government spending cuts and negative fallout from the euro zone's many crises.
As a result the central bank has largely exhausted its standard monetary toolbox centered on interest rates and now is considering how to further ease monetary conditions if the need should arise.
Mr. Lizal said that now that interest rates are close to zero, "the natural question is what's next. For a small, open economy like the Czech Republic, in current conditions foreign exchange (intervention) is the best second tool you have."
The central bank is not considering other non-standard monetary tools such as quantitative easing, as the Czech financial system already enjoys a surplus of liquidity and putting more money into the system would not help.
Mr. Lizal said he doesn't favor a particular foreign exchange rate for the koruna, but rather will gauge policy needs via inflation, economic performance and current market developments.
"Based on the latest prognosis from the central bank, it suggests further monetary easing in the middle of next year," Mr. Lizal said, adding that the bank's forecasts have been largely accurate in the recent past and so he is comfortable with this estimation.
The discussion now is about the tool to use, not how and when to use it, he said without directly responding to a question on what foreign exchange rate he'd like to see.
On Oct. 19, Kamil Janacek, Mr. Lizal's peer on the central bank's seven-strong monetary policy board, said an exchange rate of above 25 koruna to the euro is good for exporters and the economy and is the strongest foreign exchange rate he'd like to see so long as the economy is weak.
At 1402 GMT Monday, the koruna traded at 25.25 to the euro. The koruna has remained above 25 to the euro since late October.
Mr. Lizal also said any recovery by the Czech export-based economy hinges on a return to growth in the euro zone, which is the Czech Republic's largest trading partner.