By Radoslav Tomek and Peter Laca (Bloomberg 19.1.2012)
Czech interest rates may be left unchanged at a record low through this year unless the economy shows a “surprise” buildup of inflationary pressures, central bank Governor Miroslav Singer said.
The Prague-based Czech National Bank kept the benchmark rate at 0.75 percent, a quarter-point below the European Central Bank’s main rate, for a 13th meeting last month as policy makers weighed a worsening economic outlook against accelerating inflation. The Czech economic outlook is clouded by the debt crisis in the euro area, which takes about 70 percent of the country’s exports.
The economy may show “very low growth, or a growth number that hovers around zero,” Singer said in an interview in Vienna yesterday. The spike in headline inflation above the central bank’s 2 percent target near the end of last year was caused by an increase in the value-added tax and isn’t a reason for changing interest rates, he said, adding the koruna should strengthen in the longer term.
The central bank is moving “closer to stability of rates for a longer period,” Singer said. “In 2012, I’d be much more skeptical on any move, unless we get some surprise,” he said, referring to inflationary pressures that would stem from the domestic economy.
Resurgent Price Growth
Eastern European policy makers face resurgent price growth due to weakening currencies and the worsening economic outlook in the euro region, their biggest export market, which may be nearing a recession under the weight of its debt burden and government austerity plans.
The Czech inflation rate was 2.4 percent in December, declining from a 35-month high of 2.5 percent in the previous month. The central bank said it may have been influenced by prices rising ahead of the increase in the lower VAT bracket to
14 percent from 10 percent at the beginning of this year.
Domestic demand-driven inflation pressures aren’t visible, according to minutes from the Dec. 21 meeting released Jan. 6.
“Three percent inflation isn’t monetary relevant inflation, it’s pushed by the VAT change,” Singer said. The monetary-relevant inflation, which is price growth adjusted for the primary impact of changes in indirect taxes, should be “very close to the target,” he said.
The central bank’s base-line forecast, published Nov. 3, sees the koruna gaining this year, with the average exchange rate at 23.1 to the euro. It assumed a decline in market interest rates at around the end of last year.
Sharp Slowdown
The bank also prepared an alternative scenario that sees a “sharp slowdown” in the euro area’s economic growth this year.
This outlook sees a weaker koruna and stable market interest rates.
“Even in November, we were communicating also alternative forecasts that saw sub-zero growth. I believe now we would be moving toward very low growth or a growth number that hovers around zero,” said Singer.
The economy shrank 0.1 percent in the third quarter from the previous three months, the first quarterly contraction since a 2009 recession. Gross domestic product growth slowed to 1.2 percent from a year ago in the July-September period, from 2 percent in the previous quarter.
The koruna has lost 2.7 percent to the euro in the past three months, the second-worst performance, after Hungarian forint, among 25 emerging markets currencies tracked by Bloomberg. It traded at 25.560 to the euro as of 9:08 a.m. in Prague, down 0.2 percent on the session.
The koruna is currently affected by contagion from countries in Europe that are experiencing economic difficulties, Singer said, expecting the currency to resume gaining “in the longer-term,” Singer said.
“If I take a look at how the government is able to finance the debt, if I look at export numbers, especially the net export numbers, I am quite positive,” he said. “Over the long run, I’m still relatively optimistic.”