By Peter Laca (Bloomberg 13.4.2010)
The Czech central bank faces no pressure to tighten policy and has room to cut interest rates as a strong koruna and weak consumer demand tame inflation, Vice Governor Miroslav Singer said.
“If the rate was a quarter-point lower, there wouldn’t be anything forcing us to increase it,” Singer said in an interview in Prague yesterday. “It’s quite evident that rate increases don’t look imminent.”
The koruna has appreciated 5 percent against the euro this year, helping keep inflation below the bank’s 1 percent lower target limit and creating room for more easing. The Ceska Narodni Banka can also turn to options besides lowering interest rates to relax monetary conditions, Singer said, without elaborating. Poland’s central bank last week intervened to cap zloty gains for the first time in 12 years as emerging European Union currencies outperform the euro.
Singer was one of two policy makers who voted for a quarter-point cut in the benchmark two-week repo rate at the bank’s last board meeting on March 25. The remaining four members at the meeting voted to keep the rate at a record-low 1 percent, the same as the European Central Bank’s main rate.
The koruna gained 0.2 percent to trade at 25.131 to the euro as of 8:30 a.m. today in Prague. A close at that level would be the strongest since September 22, according to Bloomberg data.
Below Target
Inflation stood at 0.7 percent in March, compared with the central bank’s target range of 1 percent to 3 percent. The Czech Republic, home to Volkswagen AG’s Skoda cars, is recovering from its worst recession since it abandoned communism 20 years ago.
The bank had forecast a 0.8 percent increase in consumer prices in March. Besides keeping a lid on prices, a strong currency hurts Czech trade, which makes up more than three quarters of the economy.
The bank said in the minutes of its March meeting that rate increases will come later and at a slower pace than assumed in its February forecasts, in which it signaled higher borrowing costs after June.
Currency gains in central and eastern Europe may delay monetary tightening and extend easing cycles as policy makers try to cap exchange rate strengthening, JPMorgan Chase & Co.
economist Miroslav Plojhar said in a March 26 interview.
Future Developments
Though Singer declined to give specifics on what policy tools it’s considering deploying besides the benchmark rate, he said measures would “probably be those that directly affect channels efficiently, influencing future inflation development, and have been, or are used, by other central banks targeting inflation.”
A strong koruna and weak household spending may “lead to undershooting of the inflation target,” Singer said.
Poland’s central bank bought foreign currency on April 9 to weaken the zloty after it gained 6.4 percent against the euro in the first quarter. The Bank of Israel has also bought foreign currency to shore up reserves, weaken the shekel and help exports.
“What I’m concerned about is the condition mix as a whole; it’s not about the koruna as such, as it also includes weak consumer demand,” Singer said. “We have very healthy foreign trade, we have weak consumer demand, and there are even some inflows of EU funds as well” which will continue to support the currency.
‘Deeper’
Singer declined to comment on the current koruna’s exchange rate or on the pace of its strengthening.
JPMorgan’s Plojhar said last month he expects further appreciation this year. “The risk to the outlook is that rate cutting cycles in Romania and Hungary will be rather deeper and that rate hiking cycles in Poland and the Czech Republic will start rather later,” he said.
The Czech central bank estimates that a 1 percentage-point strengthening against the euro may shave as much as 0.25 of a percentage point off the inflation rate.
The export-reliant Czech economy picked up strength in the final three months of 2009, growing a quarterly 0.7 percent, the second consecutive increase after three declines. Domestic demand remained weak, with household consumption falling a quarterly 0.6 percent in the last three months of 2009, while retail sales dropped an annual 2.1 percent in February.
The bank expects the inflation rate to rise above its 2 percent target midpoint in the fourth quarter, while staying within the 1 percent to 3 percent target range. Price growth should ease in the first quarter of 2011, it has said.
The bank sees inflation relevant for monetary policy, which is price growth adjusted for changes in indirect taxes, staying under the target until March next year.
Czech Central Banker Singer Says Rate Increases Aren’t Imminent
The Czech central bank faces no pressure to tighten monetary policy and has room to cut interest rates, Vice Governor Miroslav Singer said.
The following are comments Singer made in an interview with Bloomberg News yesterday in Prague.
On Interest rates:
“If the rate was a quarter-point lower, there wouldn’t be anything forcing us to increase it.
“It’s quite evident that the rate increases don’t look imminent.”
On other policy tools:
“They would probably be those that directly affect channels efficiently, influencing future inflation development, and have been, or are used, by other central banks targeting inflation.”
On the koruna:
“Foreign demand is recovering, and the country is emerging from the recession, which is initially helping the corporate sector as exports are rising, while consumers traditionally prefer saving over spending.”
These factors “create pressure for a faster koruna strengthening, which may be a short-term or middle-term phenomenon, but it could, together with weak demand-side pressures, lead to undershooting the inflation target.
“I don’t know whether what we see now is a long-term trend, but the koruna is certainly an anti-inflationary risk.
“I don’t see that many factors in the coming months, or maybe quarters, that should cause a major weakening of the koruna, so it is one of significant anti-inflationary risks.
“Fundamentally, there will be few pressures for koruna depreciation in the coming period. We have very healthy foreign trade, we have weak consumer demand, and there are even some inflows of EU funds as well. So overall, I see few reasons why the koruna should dramatically weaken.
“What I’m concerned about is the mix of conditions as a whole; it’s not about the koruna as such, as it also includes weak consumer demand.”
On economic data:
“I have not seen any dramatic data” since the last monetary policy meeting. The latest data “fit into my picture of the economy.”