By Alan Crosby and Douglas Lytle (Bloomberg 8.7.2010)
Czech central bank Governor Miroslav Singer, who took office last week, said interest rates are likely to remain at a record low for “quite a while.”
Monetary policy needs only “fine-tuning,” Singer said in an interview today in Prague. The Ceska Narodni Banka left its benchmark interest rate at 0.75 percent on June 23, after an unexpected cut in May reduced it to a quarter-point less than the European Central Bank’s main rate.
“At this moment, I don’t see a move,” said Singer, 42.
“My gut feeling is that this situation may stay for a while. It is very difficult to get consensus for further cuts, and the economy is about where it was when we cut, or before we cut.”
East European nations, including the Czech Republic, are emerging from the worst recession since the end of communism as trade increases. The central bank signaled in its May forecast that borrowing costs may be steady until the end of 2010 and start rising in 2011, when economic growth should accelerate to
1.8 percent from the 1.4 percent estimate for this year.
The country had its 17th consecutive trade surplus in May and industrial output rose to a 30-month high in April, driven by car production at the local units of Skoda Auto AS and Hyundai Motor Co. Auto-industry output grew 29 percent in the first quarter and exports increased 23 percent. The unemployment rate dropped to a six-month low in May at 8.7 percent.
Growth ‘Path’
Singer, a University of Pittsburgh-trained economist who was a deputy governor before taking the bank’s top job on July 1, said the Czech economy, which exports about 70 percent of its output, is on “a path to moderate growth” this year and the expansion will accelerate in 2012.
The Czech Republic’s small size and its exposure to outside economic shocks means the bank must “move rates more often than, say, the United States,” Singer said.
“I’ve never been unhappy with changing rates,” he said.
“And not only down. The last two years provided a more downside scenario than before, but even before that from time to time I can remember being outvoted in voting for a hike.”
At the central bank’s last board meeting, policy makers “agreed that the balance of risks to the inflation forecast was currently broadly balanced,” though “the general uncertainties of the forecast were still comparatively high,” according to minutes from the session.
Inflation Moves
The inflation rate rose to 1.2 percent in May from 1.1 percent in the previous month, above the central bank’s forecast of 0.9 percent. The bank’s latest forecast put inflation at less than the 2 percent target in 12 to 18 months.
The koruna, which has lost 1.5 percent against the euro since April 14, doesn’t pose a threat of boosting consumer prices, Singer said. The koruna traded at 25.446 per euro as of
1:09 p.m. in Prague.
“The current weakening is not bringing any inflationary pressures because consumption is subdued and banks are not lending that much,” he said.
The Czechs, who must adopt the euro as part of their agreement to enter the European Union in 2004, don’t have a target date for the switch. Czech policy makers have said that an independent monetary policy and currency helped the country cope with the impact of the global economic crisis better than the 16 euro-region nations.
Singer didn’t comment specifically on the timing of joining the euro. “I don’t think the euro is going to be a focal point of our policy making in the monetary policy horizon, or in the next two or three years,” he said.
Czech Central Banker Sees New Debate About Post-Crisis Rules
Czech central bank Governor Miroslav Singer said some policy makers are having “second thoughts” about changes that may be needed in financial markets and the banking industry after the global economic crisis.
Singer, who took office July 1, made the comments today in an interview at the central bank in Prague.
On regulation and new banking rules after the economic crisis:
“It seems to me that stronger momentum to introduce regulation has already sort of been here and now we are still in that momentum. But a lot of actors are having second thoughts or have started calculating what it altogether means, because there are a lot of things that seemed to be reasonable once, but then one starts thinking” about the broader impact.
Some studies have shown that some proposals “might work a little too much as a brake.”
On proposals that would “harmonize” market rules:
“I don’t think this is correct” that everything needs to be harmonized. “On a very general level, I must say I have doubts because we are dealing with uncertainties in general.”
“The way to deal with uncertainty is not to introduce one fit-for-all measure, because sooner or later everyone has to make a wrong decision. And as much as we harmonize, that much of the whole world will be hit by the mistake.
“The way to deal with uncertainty is diversification” in responses. “The fact that Canada had a different supervisory structure obviously prevented Canada from being hit that much by the finance crisis; the same with part of Asia. They’ve been hit by a drop in demand for real output, but they have not been hit by the financial crisis.
“I am not sure we need to harmonize everything. I definitely appreciate any time to deliberate and think about what it all means.”
On his view of the Czech economy:
“The Czech economy is open. One change balances the other, and in general we are on a path to moderate growth this year and maybe some speeding up of this very moderate growth next year, basically in line with our forecast. There seems to be next year a bigger effort on fiscal strengthening in the euro-zone.
“On balance my outlook is pretty close to the forecast -- low inflation risks and low growth.”
On whether there is room for another interest-rate cut:
“Given that we have 0.75 percent and it is very difficult to get consensus for further cuts and the economy is about where it was when we cut or before we cut, I probably would say we will keep these rates for quite awhile.”
“At this moment, I don’t see a move. My gut feeling is this situation may stay here for quite awhile, but talking about next year doesn’t make much sense. I’m not thinking in this dimension.”
On his style of managing interest rates and working with the central bank board:
“I’ve never been unhappy with changing the rates, not only down. But in the last two years it provided a more downside scenario than before, but even before that from time to time I can remember being outvoted in voting for a hike. So I would say I don’t feel unhappy about changing the rates. I am not unhappy about using some of the monetary policy meetings to change the rates.
The Czech Republic’s size and openness to outside economic shocks means the bank must “move rates more often than, say, the United States.”
On building consensus with other policy makers:
“The previous governor” left all decision making to be done on the meeting. “I do not recollect myself discussing the rates in advance. And I would rather stick with this as it leaves the meeting very productive. My feeling is monetary policy is working quite nicely. I’ve always been very comfortable in being outvoted in these types of decisions.”
Singer said he doesn’t see a consensus that rates can be lowered.
“I think the general consensus is that the low rates may stay with us even longer than even those who were more skeptical on this previously. But I hate becoming a speaker of other board members, you’d better ask them.”
On the incoming government’s proposed fiscal policies:
Singer declined to comment directly.
“In general, the direction is good. The government plans deeper reforms next year. We definitely appreciate there is some fiscal consolidation going. Given these trends would not be sustainable for the longer period, that would create a lot of problems for our job as well.
“At this moment I am relatively relaxed, and in terms of short-term monetary policy horizon or monetary policy decisions, the fiscal outlook is not changing too much. It’s much more about long-term stability and credibility if lost, would generate a problem for monetary policy making.”
On koruna exchange rates and the outlook for the economy:
“My feeling is the risks are balanced, and I would even feel they might be marginally on the downside, meaning anti- inflationary. But very slowly and definitely it does not justify any reaction at this moment. It seems to me the economy is developing in line with what we expected.”
“The current weakening” of the koruna “is not bringing any inflationary pressures because consumption is subdued and banks are not lending that much.”
On communication with the markets:
“I think we are trying to be very open, and we are in general finding it useful. I think we have probably reached the limits of what we can say or we are in just fine-tuning. We communicate quite often and on an individual basis.”
On the euro:
“I don’t think that the euro is going to be a focal point of our policy making in the monetary policy horizon in the next two or three years because the euro-zone must decide on its institutions. We will have to see whether we carry out successful fiscal policy reform. Some political crisis will occur, I’m sure. Sooner or later, some other things will occur in Europe, so for next few years I don’t think this is something one should worry about.”
On borrowing by the Czech state in the markets:
Singer declined to comment directly on bond and Treasury activity by the Finance Ministry during the first half of the year or on future borrowing plans except to note that it is possible the country will have to accept higher yields as part of its sales of debt.