By Sean Carney (Dow Jones 18.6.2013)
Tame inflation means the Czech central bank can keep interest rates at historic lows for the time being, but easy-money policy is only of temporary value, a member of the Czech central bank's monetary policy board told The Wall Street Journal Monday.
"Low rates from a short-term perspective don't necessarily create risk," said Pavel Rezabek, a member of the bank's board who often prefers stability to swift policy changes. "[But] From a long-term perspective, low rates could pose significant risk of creating asset-price bubbles."
Mr. Rezabek said that the central bank doesn't currently see any asset bubbles in the Czech economy.
The central bank's next monetary policy decision is due on June 27 and its benchmark rate stands at 0.05%. Analysts expect no change to policy.
In the absence of inflationary pressures, loose monetary policy makes lending cheaper and helps exporters, the only segment of the recession-plagued economy that continues to grow.
"In the framework of positive impulses for domestic manufacturing, a weaker koruna is more advantageous. And such a view is incorporated into the [central bank's] forecasts," he said.
In the Czech Republic, where consumer prices are stagnant, a weak koruna is also a preventative measure for deflation. Unlike Miroslav Singer, the bank's governor who has expressed concerns about deflationary risks, Mr. Rezabek said he personally doesn't see any at present.
"For a deflationary spiral to emerge in a small open economy [like the Czech Republic], it'd probably have to touch most of Europe," he said.
Mr. Rezabek said he supports the central bank's official forecast of a resumption of economic growth later this year, but he is less sure of how strong the comeback will be.
"It's possible to surmise that the worst is behind us. But on the other hand, the signals so far are very weak and it's difficult to predict the size of the economic recovery," he said, adding that the outlook for the broader European economy is key.
The Czech economy has contracted each quarter since late 2011 as the right-leaning government cut fiscal spending to lower the deficit. According to central bank estimates, that's trimmed 0.6% from Czech gross domestic product. The cuts have encouraged households to save rather than spend as real wages fall and unemployment rises.
"In the phase of the economic cycle that we currently find ourselves in, marked fiscal consolidation isn't the best solution," he said.
Mr. Rezabek said the government could undertake some pro-growth spending, though due to the European Union's fiscal debt and deficit limits that would only compensate for the economic loss caused by austerity but wouldn't expand the economy.
"Perhaps a prudent approach would be reduce issuance of retail bonds, which would encourage households to spend in the real economy rather than saving at the expense of the state," he said.
The Czech Finance Ministry over the last two years has sold bonds directly to retail clients, giving households an attractive investment and providing the government with an alternative lending source. But the policy is more expensive for the state than selling debt to institutional investors and increases savings levels at the expense of current economic activity, he said.
Mr. Rezabek said the resignation of Prime Minister Petr Necas later on Monday will have little impact on the real economy. "The economy is significantly autonomous from politics. It's the same for all developed countries," he said.
He also dismissed concerns that an early election would disrupt markets.
"If I look at history, elections in the Czech Republic haven't had any dramatic, immediate impact on the Czech economy. The Czech Republic is an open economy that belongs to a group of developed countries" Mr. Rezabek said.