By Peter Laca (Bloomberg, 8.1.2010)
Czech central bank Vice Governor Miroslav Singer said he expects the bank to leave interest rates unchanged “in the near term” and may start tightening monetary policy later this year.
Singer was among board members who pushed through the Prague-based Ceska Narodni Banka’s quarter-percentage point cut in the benchmark two-week rate to 1 percent at the last rate- setting meeting on Dec. 16, the seventh reduction since August 2008. Singer commented in an e-mail to Bloomberg late yesterday.
The economy’s rebound from a recession that pushed gross domestic product down as much as 5 percent in the second quarter of last year is still patchy. Household spending dropped 0.6 percent in the third three-month period of 2009 and retail sales declined for a 13th month in October.
With the last rate decision, “and afterwards, I rather expected that rates will be stable in the near-term,” Singer said, adding he has not decided yet on future policy steps. The next monetary policy meeting is scheduled for Feb. 4.
The Czech koruna in the past three months has dropped 1.8 percent against the euro, after gaining about 7 percent in the second quarter against the common currency. The koruna was trading at 26.31 to the euro at 9:11 a.m. in Prague today.
Weak Western Demand
The economy, whose exports account for about 70 percent of gross domestic product, shrank an annual 4.1 percent in the third quarter after demand for its products tumbled in key markets in western Europe. Lower production activity also curbed investment plans and companies cut jobs, which curtailed household spending, keeping a lid on inflation.
Still, the economy grew on a quarterly basis in the second and third quarters last year, prompting the central bank to predict price growth will accelerate toward its target of 2 percent this year.
Singer said “it’s possible” that the bank will raise interest rates as early as this year, although he has not considered a more precise timing yet.
Singer was quoted by the newspaper Hospodarske Noviny yesterday as saying there should be “relatively few impulses” for increasing interest rates in the first half of the year, and that the bank may later start policy tightening as borrowing costs will increase abroad. The most important foreign interest rates for bank are the European Central Bank’s rates, Singer said.
The Federal Reserve and the ECB are preparing to roll back asset purchases and tighten conditions at liquidity auctions as the global economy emerges from the deepest recession since World War II.
Drawn-Out Recovery
Czech central bankers will delay increasing rates from record lows until the latter part of this year as a drawn-out recovery damps inflation, Goldman Sachs Group Inc. said in a quarterly economic outlook published on Jan. 4.
The central bank’s Nov. 5 forecast predicted rates to go lower and then rise within the 12-18 month monetary policy horizon, although it did not specify the time frame for the policy changes.
Singer said that in general, the central bank has changed rates “often before” bigger economies or the euro area, although that doesn’t necessarily have to apply to future rate decisions.
The central bank may not need to use other measures than raising rates when it moves to tighten monetary policy, although a debate on using different instruments “can’t be ruled out,” especially in the event of surprising developments abroad, Singer said. Other measures may include buying koruna or changing reserve requirements.