By Peter Laca (Bloomberg 29.10.2013)
The Czech central bank should start selling the koruna for the first time in 11 years, driving up import prices by weakening the currency to bring inflation to its target, Vice Governor Vladimir Tomsik said.
The need for currency interventions has increased since the central bank published its latest forecast in August, with data pointing to growing disinflation risks, Tomsik said in an interview on Oct. 25 and cleared for publication today. While the economy is showing some signs of recovery, it remains far from generating inflation pressure, he said.
“Foreign-exchange interventions are still very probable,”Tomsik said in his office at the central bank in downtown Prague. “It’s not possible to expect inflation to move toward the target without delivering further policy easing.”
Czech rate-setters have been debating for almost a year whether slowing price growth warrants the first koruna sales since 2002 after three interest-rate cuts last year exhausted room for traditional monetary stimulus. Faced with narrowing policy options as the economy exited a record-long recession in the second quarter, the board rejected proposals to start interventions at the last two meetings.
Currency Focus
The currency has shifted to the center of policy deliberations because its depreciation would make imports more expensive and boost the competitiveness of exports, curbing deflation risks. The koruna has lost 2.6 percent against the euro this year, trading 0.2 percent weaker at 25.753 by 2:18 p.m. in Prague today.
“When the monetary policy so far hasn’t delivered further easing of monetary conditions, and there are signals of new anti-inflationary risks, I’m asking myself: ‘what will generate inflation next year to make it come near our inflation target?’” Tomsik said. “I personally wouldn’t hesitate to relax monetary conditions further already.”
Consumer prices rose 1 percent from a year earlier in September, the slowest pace since March 2010 and below the central bank’s 1.4 percent forecast. Inflation relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.2 percent in September from 0.5 percent in August and has undershot the central bank’s 1 percent-3 percent target since February.
‘Anti-Inflationary’
“The prevailing message of the new information we have received since the publication of the latest forecast is in an anti-inflationary direction,” said Tomsik.
Core inflation, food costs, regulated prices and the outlook for electricity charges underpin the need for looser monetary policy, he said.
The Ceska Narodni Banka kept the benchmark interest rate at what it calls a “technical zero” of 0.05 percent on Sept. 26, almost half a point below the European Central Bank’s benchmark.
It will next review monetary policy at a Nov. 7 meeting in Prague.
While central bank Governor Miroslav Singer has also called for monetary easing, a majority of the seven-member board rejected proposals to start koruna sales in votes on Aug. 1 and Sept. 26.
Highlighting the division among policy makers, board member Kamil Janacek said he was cautious about starting the interventions because of the lack of clarity over how to manage its exit from currency sales, according to an interview with Reuters published today.
Janacek said last month that he’ll be ready to back koruna interventions if signs of deflation risks emerge.
High Chance
Most board members agreed at the September meeting that the probability of starting currency interventions remained high, minutes from the session showed.
Some rate setters said weakening the exchange rate now would risk damping private consumption and curbing economic growth, the minutes said, without revealing individual views of board members. The bank doesn’t publish details of votes on currency interventions.
“I wouldn’t consider it a pragmatic economic policy to do nothing and take a two-year holiday when the forecast is showing me a need for monetary-policy action to meet the inflation target,” Tomsik said. “Monetary policy should do its job as I fear that the cost of a passive approach would be large.”
Czech Central Bank Needs to Deliver Further Easing, Tomsik Says
The Czech central bank needs to relax monetary policy further to lift inflation toward its target, Vice Governor Vladimir Tomsik said. Tomsik commented on monetary settings, economic recovery and koruna interventions in an Oct. 25 interview cleared for publication today:
On monetary easing:
“Our forecasts have been assuming further easing of monetary policy for some time. Since January 2013, the forecasts have indicated that we should deliver another interest rate cut, by 25 basis points.
‘‘The August forecast then showed that we should deliver a second interest rate cut, by 50 basis points in total. This means the forecasts are showing the need for further relaxation of monetary conditions.
‘‘I personally think that the need for relaxing monetary conditions has increased even further from what was indicated in the August forecast.
‘‘It’s not possible to expect inflation to move toward the target without delivering further policy easing.
‘‘Foreign-exchange interventions are still very probable. I would personally say the need to launch them may even be increasing because of the cumulating anti-inflationary pressures.
‘‘When monetary policy so far hasn’t delivered further easing of monetary conditions, and there are signals of new anti-inflationary risks, I ask myself, ‘what will generate inflation next year for it to come near our inflation target?’ I personally wouldn’t hesitate to relax monetary conditions further already.’’
On disinflation risks:
‘‘The prevailing message of the new information we have received since the publication of the latest forecast is in the anti-inflationary direction.
‘‘Core inflation, food prices, regulated prices and the outlook for next year, namely all components of electricity prices, all this new information is showing more relaxed monetary conditions are needed.
‘‘I wouldn’t consider it a pragmatic economic policy to do nothing and take a two-year holiday when the forecast is showing me a need for monetary-policy action to meet the inflation target. I believe monetary policy should do its job, because I fear that the cost of a passive approach would be large.’’
On economic recovery:
‘‘There are some signs of an economic recovery, but I’m convinced that there is a wide output gap, meaning the economy is performing well below potential output. Because of this, it would take a long time before we see a pick-up in inflationary pressures.
‘‘An important factor to consider is that we are seeing historically low growth in nominal wages this year in the Czech private sector.
‘‘Moreover, the revival in the export industry may resume, generating appreciation pressure on the koruna, which would add to anti-inflationary risks.
‘‘If a weaker koruna makes imports more expensive, then I see this translated into cutting retail margins. I don’t expect more expensive imports to have a material impact on retail prices in the Czech Republic, because demand is weak and unemployment is high.’’