By Lenka Ponikelská (Bloomberg 13. 3. 2015)
The Czech economy is exposed to disinflationary pressure coming from abroad and the European Central Bank’s quantitative easing increases uncertainty for the inflation outlook, according to central bank Vice Governor Mojmir Hampl.
Hampl commented on Czech economic growth, the koruna cap regime and criticism by President Milos Zeman in an interview in Prague on March 11.
On inflation trends:
- The development since the last policy meeting is roughly in line with our forecast, I don’t see any dramatic deviations.
- Even as oil prices are starting to move slightly higher, we have said that this year’s inflation will be significantly influenced by the lower cost of energy commodities.
- The impact is so strong that the difference between actual inflation and a hypothetical rate that would be adjusted for this effect is expected to be almost 1.5 percentage point at the end of the second quarter of this year.
- Without this positive supply shock, we would quite probably be at least within the tolerance band of the inflation target already this year.
- The part of inflation influenced by demand, or core inflation, remains in positive numbers.
- The central bank has decided not to react to this extraordinary development, which is similar to its decision in 2008 when food prices and commodities were affecting inflation in the opposite direction.
On secondary impact:
- Potential secondary effects of low commodity prices would be seen in both soft and hard indicators. The soft data would include a drop in inflation expectations
- I don’t see any problems in this respect now. Inflation expectations have reversed their downturn after our decision in 2013 to use the koruna exchange rate to deliver monetary easing.
- Wages are a very important hard indicator that I would recommend for everybody to watch closely. If real and nominal wages reversed the current revival trend, it would be a signal that deflation expectations in the economy may be rising.
On GDP growth:
- GDP numbers showed a recovery throughout last year that was based on all key segments of domestic demand.
- If we disregard the unpredictable developments with inventories, investments alone are rising as well as other segments of domestic demand.
- I’d say it’s a decent, stable recovery that’s not based only on one driver, even though overall growth was slightly worse than what was generally expected last year because of some effects from abroad.
- The economy has turned around from the longest recession on record and experienced a relatively strong revival during four quarters.
- These numbers are certainly confirming that our 2013 predictions of the main tendencies were correct. It’s also a confirmation that the monetary policy has a relatively strong effect, at least in a short-term period, because it’s influencing the demand factors in the domestic economy.
On koruna cap exit:
- We have been moving the exit to a later date, which makes the issue less topical than it was, for instance, several quarters ago.
- An ideal exit would be reasonably smooth, in terms of currency volatility, for which the economic players will be prepared.
- The timing of the exit is key as the central bank would seek to align two goals: ensuring a smooth transition and at the same time making sure that it won’t need to return to the currency-cap regime again.
- Having this certainty would mean that the exit should take place when the economy is ready for a relatively strong monetary-policy tightening. The question is whether such exit can be as smooth as desired. That’s why the timing is everything, and these principles need to be balanced to meet both of these goals.
- A lot will depend on developments outside the Czech economy. Since we introduced the exchange-rate commitment, every external shock was anti-inflationary.
- Anti-inflationary pressures are accumulating in the external environment, and there is still a big question about the impact of further monetary-policy easing in the euro zone.
- The experience from the past makes me think more whether we might not need to keep the exchange-rate commitment for a bit longer, rather than worry now about the exact timing of the exit.
- For now, we’ve considered prolonging the commitment period as delivering sufficient easing of monetary conditions, which was also shown in the gradual decline in market interest rates.
On koruna cap level:
- The wording of the message after the last meeting was quite clear, and it still reflects my thinking at this moment. I don’t see any significant development in risks since we made that statement. But especially external risks remain high, and surprises coming from the outside in the past few years have been only anti-inflationary and negative in terms of demand.
- If I had to base my prediction only on past developments, I would have to expect anti-inflationary risks getting stronger.
On president’s comments:
- It’s very difficult for me to take statements about monetary policy by the president of the state seriously. I see them as inconsistent, irrational, even illogical.
- They may cause some short-term koruna swings because the market is less liquid and more nervous mainly because of what’s happening in Europe. But I think the koruna’s recent tendency to strengthen isn’t driven by these statements; it’s driven by expectations of market participants of the impact of ECB decisions. That’s the fundamental factor.
- What I consider a bigger risk is the potential impact on the koruna from the ECB decisions. The market forces are more significant, fundamental factors for small and open economies.
- But that’s why we have the exchange-rate commitment, and that’s why we have pledged to defend it in any circumstances.