(Reuters 28.1.2013)
* Downside risks have grown since last forecast
* Weaker FX helps offset downside risks, not clear if enough
* Ready to support FX interventions if needed
* Zero rates can help make interventions very efficient
The Czech central bank is ready to sell crowns on the market if it needs to loosen policy further, but remains committed to targetting inflation rather than the exchange rate, Vice Governor Vladimir Tomsik said.
He told Reuters in an interview the bank is still focused on its 2 percent inflation target and that interventions should be seen only as an alternative and temporary monetary policy tool to achieve the main goal.
The bank cut the key two-week repo rate to all-time low of 0.05 percent in November, a level it calls a "technical zero", to offset a slowdown in price growth. It said it would push the crown weaker if it needs to ease more.
Tomsik dismissed talk among some economists about a possible switch in the bank's monetary policy framework to targetting the exchange rate instead of solely focusing on prices.
"We continue to target inflation, and we certainly do not plan to target the exchange rate," Tomsik told Reuters.
"The exchange rate is seen only as an alternative tool within the framework of inflation targeting that we would use -- if it is needed -- only temporarily," he said.
He added temporarily meant "until we see that our forecast of inflation is aiming towards the (2 percent) target, while assuming positive monetary policy interest rates."
Although currently above 2 percent, the bank sees inflation falling below its target over an 18-month horizon.
The Czech economy has not grown since the middle of 2011 with government austerity hitting consumption and falling demand for Czech industrial goods from the euro zone dragging down investment.
The bank's November quarterly forecast sees inflation falling below target towards the end of 2013 and assumes a negative repo rate from around the middle of the year, which is seen as the time when interventions may take place.
Tomsik said downside risks have grown since the forecast was released, citing a third-quarter gross domestic product (GDP) drop, falling private consumption, and slower-than-forecast inflation.
But he said it did not automatically mean interventions should start soon because a weakness in the crown, in part a result of the poor data and partly due to repeated verbal interventions by central bankers, was offsetting the downside risks to some degree.
"Such a development in the exchange rate undoubtedly helps relax monetary conditions, but I am unable to say at this moment whether it will balance out the newly observed anti-inflationary risks or even delay the debate on launching an intervention."
The average rate of the crown in the first quarter was 25.5 per euro, below the bank's forecasts for 25.1.
He said the bank's new forecast due to be released on Feb 6 should bring more light into the bank's next course of action.
NO INFLATION BOGEY
The "double-dip" in gross domestic product growth over the past three years has persuaded Tomsik there was no great inflation threat in the Czech economy.
"It's not about being a dove or a hawk. If there is no inflation bogey, it is needed to relax monetary policy to meet the inflation target," he said.
"I am ready to go into interventions if there is a need to further ease."
With official borrowing costs at zero and the bank's pledge to keep them there for some time, interventions can be more efficient than usual in raising import prices, averting household expectations for prices to fall, and supporting exporters, Tomsik said.
"The impact on inflation from potential interventions can be many times stronger than any time before when... an exchange rate shock was always compensated for by the central bank through a change (upwards) in interest rates."