By Sean Carney (Dow Jones Newswires 19.10.2012)
The Czech central bank could cut its benchmark interest rate to 0.1% and intervene to prevent rapid koruna appreciation in order to kick-start its contracting economy, a member of the country's monetary policy board said Friday.
An exchange rate of 25 koruna ($1.31) to the euro is good for exporters and in turn for the central bank, while separately the country should seek a permanent opt-out from the European Union's planned banking union that risks creating a moral hazard, Kamil Janacek said in an exclusive interview.
"We can use a mix of [interest] rates, cutting to 0.1%, and exchange-rate [intervention] to indirectly help Czech exporters," Mr. Janacek said.
The Czech central bank last month cut its headline interest rate to a record-low 0.25% to help the local economy which has been contracting on both a quarterly and annual basis since the start of the year.
Amid rising domestic taxes, crisis in the euro zone and recession at home, households have been increasing savings, businesses deferring investment and the government cutting expenditure in its austerity drive to lower the fiscal deficit.
The only segment of the economy that continues to grow is exports. Mr. Janacek said that by easing monetary conditions as much as possible, the central bank can make Czech exports more attractively priced abroad, boosting the domestic economy.
"We are very aware of the exchange rate and we'd like to not allow the Czech currency to appreciate quickly," he said.
The koruna repeatedly tested but didn't move below 24 to the euro last year and then weakened to 25.6 in July. It firmed to 24.3 in September, prompting the central bank to say it would intervene on markets to weaken the currency.
Excessive currency strength makes Czech exports pricy for customers mostly in the euro zone, namely Germany, and weighs on local economic activity, fuels higher unemployment and lowers tax revenue.
"We've discussed it with entrepreneurs and they're quite satisfied with the exchange rate around 25," Mr. Janacek said.
At 1011 GMT, Friday the koruna traded at 24.83 to the euro.
Mr. Janacek said the central bank is "very opposed" to the EU's banking union plan as it would create a moral hazard for Czech taxpayers.
The plan would spread banking risk from individual banks--primarily in the troubled euro zone--to taxpayers throughout the 27-member bloc, while pooling funds for deposit guarantees and allowing undercapitalized parent banks to draw liquidity from cash-rich foreign subsidiaries, he said.
The central bank, together with the finance and foreign ministries, have lobbied the government not to block the plans but to be present at negotiations and to seek a permanent opt-out, he said.
"As a supervisor, it is our constitutional and legal duty to protect price stability and financial stability," and so the Czech Republic should not participate in the scheme, he said.
The Czech banking sector overall had a capital adequacy ratio of 16.3% in April, the last month for such figures, while the EU's Basel II regulations require only 8%.
With current capital levels, Czech banks could withstand a 7% contraction in gross domestic product, ensuring stability in domestic markets and the safety of deposits, he said. However, that could vanish if the banking union plan is enacted and capital is siphoned out of the country, he said.
Mr. Janacek said the government's austerity-minded intention to lift the two sales tax rates which now stand at 14% and 20% by one percentage point each in January would add 0.7 percentage point to headline inflation. An alternative government plan to unify the two rates at 17.5% would reduce headline inflation by 0.3%, he said.