By Jana Mlcochova and Michael Winfrey, Reuters (2.6.2010)
No event since the last Czech central bank policy meeting has provided a reason to change interest rates and it is becoming more and more difficult for the board to cut, a top central banker said on Wednesday.
The bank surprised markets on May 6 by cutting the main two-week repo rate used to drain excess liquidity to a record low 0.75 percent, relaxing borrowing costs by a cumulative 3 percentage points since August 2008.
Since then a number of factors have cast doubt on the stuttering economic recovery in the euro zone, while a surprise Czech centre right victory in last weekend's general election has raised economists' expectations for deep fiscal tightening.
But central bank Vice-Governor Miroslav Singer said none were "tectonic shifts" with direct implications for Czech rates.
"There has not been an event that would force me to think that something should be changed," Singer told Reuters. "Things are moving pretty much in a way that we expected."
Singer repeated a metaphor comparing the Czech easing cycle to an object falling in a glass filled with a mix of water and jelly. The rate of decline slowed at the bottom, meaning the board would find it harder to cut rates further.
"For the board, it's more difficult to cut. I still feel this. We have a historically unprecedented low rate," he said.
"For me it's probably not that much jelly as for some of my colleagues. But for forecasting of our next moves, we are in the jelly," he added.
Most analysts see Czech rates on hold until the end of the year or early 2011 before a hike comes, although some say one more cut is possible amid tame price pressures and concerns over recovery following last year's 4.1 percent economic contraction.
"Maybe... we will simply stay here for a while and then start moving up," Singer said. "It's perfectly imaginable."
THE CROWN, ELECTION
Singer said the crown exchange rate was typically an element that could bring a surprise in policy decision making.
But in a rare comment on the currency, Singer said concerns the bank's May 6 cut would push the unit weaker, because of market swings exaggerated by the Greece crisis and from the rate differential with the euro zone, did not materialise.
"In the end we sort of decided to play it as normal, and the crown development sort of justified the opinion that there was no need to worry about Greece in our decision-making," he said.
The crown weakened 0.5 percent just after the May cut to 26.22 per euro but has gained since then to 25.77 percent on Wednesday. The bank forecast the average exchange rate at 25.2 in the second quarter and at 25.3 for the whole of 2010.
On Monday, the unit jumped as much as 1.6 percent to 25.42 after cost-cutting centre-right parties won a strong majority in the weekend vote.
"The crown is pretty much in an interval where it is absolutely fine to me. Even (after) this positive effect of what happened on Monday," Singer said.
Singer said the compromise programme coalition partners will finally be able to agree on is likely to be "less radical" than now assumed and will be rather centrist than rightist.
He also said he saw only a small impact on monetary policy and played down concerns among some economists that overzealous fiscal tightening could hit growth.
"Fiscal over-consolidation risk has a tendency to correct itself. That would not be true for big global economies, but this is what happens here," he said.
On the euro zone, the Czechs' main trading partner, Singer said factors such as liquidity measures by the European Central Bank and fiscal tightening undertaken by countries struggling to reduce their debt appeared to be balancing out with a relatively neutral impact on the Czech economy.
"Both the restriction on the fiscal side and ... the loosening of euro zone monetary principles are, with respect to our decision making, more or less balanced," he said.
SAFETY NET, EURO ZONE SITUATION:
"The fiscal response seems to be stricter than forecasted, monetary loosening was also sort of deeper than expected, so the result is balanced."
RATE CUT DECISION, OUTLOOK
"We were discussing that we might be sending a signal to the markets, and the question was, are we going with a cut to provide the market assurance that we think that, for the Czech Republic, things are pretty much as usual no matter what happens in, quite frankly, not that significant a southern economy, with all respect to its beauty (Greece)."
"That was essentially the argument for a cut."
"Everything pointed to a cut, and the cut, regardless of short-term events, was long overdue, since in case we would have had rates a notch lower, nobody would bother proposing a hike. That was probably quite clear."
"Or, the counterargument was that we could push the crown to much weaker territory because of increased risk aversion and because people do not read Czech fiscal data and debt data. In the end we sort of decided to play it as normal, and the crown development sort of justified the opinion that there was no need to worry about Greece in our decision-making."
Asked: do you think it's more difficult to cut now?
"For the board, it's more difficult to cut. I still feel this. We have a historically unprecedented low rate. In my opinion we should react in a sense normally, but such a decision would be more difficult to achieve in our board."
LIMITED ROOM
Singer said that the CNB policy rates could be so far compared to an object falling in a glass filled with water and jelly. The rate of decline of the object would slow at the bottom of glass as the object would reach the jelly.
"It's very difficult to achieve the bottom when it's jelly, and we are more in the jelly."
"It's not related that much to what is happening. It's more reflecting that going to zero is difficult, as other central banks have shown, now that it's in the jelly."
"For me it's probably not that much jelly as for other board members. But for the purpose of forecasting of next step of the board, we are in the jelly."
"We actually have pretty reasonable recovery data. Asia doesn't seem to be doing that bad, eastern Europe seems to be bottoming out of crisis, or is braking the fall, in a sense. Even some Western economies are showing signs of recovery."
"Maybe... we will simply stay here for a while and then start moving up, it's perfectly imaginable."
ON STRING OF EVENTS SINCE LAST RATE MEETING
"There has not been an event that would force me to think that something should be changed. Things are moving pretty much in a way that we expected."
"For this board it's more and more difficult (to cut)."
ON MARKET RATES IN EUROZONE
"For me the crucial thing is to be aware that official euro rates are not driving several market rates. A lot of market rates are below euro rates."
"But I am more concerned about the general demand effects than trade on forex market or derivate market."
"The general rates situation makes the short CZK long EUR (trade) or any similar scenario much less attractive than what one would think just observing our rate and the ECB rate."
"Still we do care about the demand situation in the euro zone as a major exporter."
WHAT COULD AFFECT POLICY?
"One can now imagine something coming out of the euro zone, but I would say if something like this happens, it would probably be the element of summer or fall or next year."
Then we will have to decide. But I don't think anything strong is going to happen this week or the week after the next."
"The first growth impulse is supposed to come from exports and related things such as export output, lowering unemployment, higher demand, and etc."
"That probably means that if the euro zone goes down, or the crown goes up, these things would put this scenario at risk and have consequences."
"Nothing like this is now on the radar. It might change in the future."
ON RISK OF FISCAL OVERTIGHTENING:
"Fiscal over-consolidation risk has a tendency to correct itself. That would not be true for big global economies but this is what happens here."
"This self correction of macro policies small open economy is what happened in 2000-2001."
"What is really desirable is to return to conservative (fiscal) policies."
IMPACT OF ELECTION
"It hardly changes the monetary policy outlook, it does not change it dramatically. It can change it in a subtle way that is barely identifiable in one monetary decision."
"The coalition may find a common programme in something that will not be that radical."
"We always had coalitions across centre
It seems to me it will be a similar coalition. This is, again, not going to move politics too far in one direction on the left-right dimension. I don't think there is that much of a tectonic shift in this way."
"This is not a tectonic change of a Hungarian-style with potential to formulate a budget-shifting monetary policy trend."