By Peter Laca (Bloomberg 17.5.2011)
Raising Czech interest rates without a clear evidence of inflation pressures would be more harmful to the economy than keeping borrowing costs low, policy maker Lubomir Lizal said.
The board of the Prague-based Ceska Narodni Banka voted 5-2 on May 5 to keep the benchmark two-week repurchase rate at a record-low 0.75 percent, half a point below the European Central Bank’s main rate. Lizal, 41, voted for stable rates at both the March and May policy meetings he attended after joining the board on Feb. 13.
Czech policy makers have kept the main rate unchanged for a year as inflation holds below the bank’s 2 percent target. The timing of a likely rate increase moved forward to the fourth quarter from the first quarter in 2012, reflecting expectations of more monetary tightening in the euro area, according to the quarterly update of central bank forecasts published on May 5.
“For now, I’m comfortable with the assumption in the forecast,” Lizal said in an interview today. “Unless inflation pressures are clearly visible, the flaw of keeping rates lower may be smaller than if there is a premature increase that would constrain the economy.”
The economy, in which exports account for about 70 percent of gross domestic product, is driven by demand for its goods including Skoda Auto AS cars. Czech companies also supply parts to German manufacturers, which then sell their products outside the European Union.
Slowing Growth
Czech economic growth slowed to 2.5 percent in the first quarter, from 2.6 percent in the final three months of 2010. The structure of GDP won’t be published before June 9, though Lizal said exports appeared to drive the expansion.
The inflation rate fell to 1.6 percent in April, the lowest in 10 months, from 1.7 percent in March. Price growth has slowed from a 21-month high of 2.3 percent in December and has held below the central bank’s target for four months as a firming koruna and weak consumer demand tamed the impact of higher oil and food costs.
The central bank in May cut its GDP forecast to 1.5 percent for 2011 from 1.6 percent and the 2012 outlook to 2.8 percent from 3 percent. Retail sales growth slowed to 2.1 percent in March, from 6.5 percent in the previous month. Consumer confidence has been negative for three years. It was at minus 18 in April, the second lowest reading in 20 months after minus 19 in March.
‘Uneven’ Demand
Demand is “uneven” and industry, which is linked to Germany, “appears to be doing notably better than other sectors of the economy,” Lizal said. “In this respect, the times are uncertain and if there are inflation risks, they are at the end of the monetary horizon, so there will be time to react.”
The central bank expects higher rates from the fourth quarter to help keep inflation at 2.2 percent in the second quarter of 2012 and at 2.1 percent in the following three months, according to the May forecast.
Rates may need to rise sooner than assumed in the forecast “if there are signs of stronger wage growth, or of higher demand pressures, that aren’t visible now,” Lizal said.
Czech policy makers have shown differing views on inflation risks, with some board members advocating higher borrowing costs. Eva Zamrazilova and Kamil Janacek voted for higher borrowing costs at the May meeting.
The economic outlook in “our part of the world” is clouded by a number of uncertainties, including the eventual exit from government measures supporting growth and the risks of fiscal instability, Lizal said.
“Everybody perceives signals from the economy in a different way when the economic cycle is changing,” Lizal said.
“For me, a signal would be when price pressures are clearly visible, that means that it’s not just a sign of a revival, but there is pressure on prices and inflation.”