By Jana Mlcochova and Jan Lopatka (Reuters 17.5.2011)
Rate hikes can wait until Q4
- Comfortable with bank's forecast
- Need to take into account risk from debt crisis
- Euro zone buying time with additional Greek loans
A slow recovery in demand and external risks including the debt crisis justify keeping Czech interest rates flat until the fourth quarter despite hikes in the euro zone and Poland, a new Czech central banker said.
In his first interview for foreign media, Lubomir Lizal told Reuters on Tuesday he was comfortable with the bank's new staff forecast implying one rate hike in the fourth quarter, from a current record low of 0.75 percent.
The Czech economy has been recovering from the economic crisis thanks to strong exports, but domestic demand has been hampered by lack of confidence and government spending cuts.
"So far according to data it does not seem we are behind the curve. The forecast seems to be in order, seems to describe the risks well, and we are able to react in time to those risks from the point of view of monetary policy tightening," Lizal said.
"So far I am comfortable (with a prospective hike in Q4)."
Lizal, 41, who joined the board for his first six-year term in February, said any worsening of the euro zone debt crisis could present a sudden downside risk for the Czech economy.
"The pro-inflationary risks, which are connected to an improvement of the economy, of demand, are visible first and ahead of time, and we can reasonably react to them by monetary policy," he said.
"On the other hand the negative risks ... are usually very sudden, so from this point of view I (prefer if) monetary policy takes them into account."
The central bank has held rates flat for a full year, falling behind the European Central Bank, which raised its key rate by 25 basis points to 1.25 percent in April.
Lizal said that, while German demand had a positive impact on Czech growth, helping the economy expand 0.6 percent in the first quarter from the previous three months, the upswing was manufacturing-focused and lacked a broader base even in Germany.
"In Germany, industry is doing well but the other sectors are not doing that fine," he said.
The central bank expects growth of 1.5 percent this year as domestic demand remains subdued. Lizal said he did not see any pick-up in demand this year, and that lending growth would remain low as companies still have spare capacity.
BUYING TIME
Lizal, an associate professor at Prague's Charles University economics institute CERGE-EI with expertise in transitional economies and international trade, said European authorities may lend more to Greece but that some form of debt restructuring would eventually be needed.
"Europe is still treading water and what is being offered as the solution is not a solution but buying time, (which is) more and more loans," he said. "If it was a solution, one round (of financial aid) would have been enough."
"The solution may be that either someone will pay up for Greece, or there will be some form of restructuring," Lizal added, an apparent reference to suggestions of a possible write-off or maturity extension on Greek debt owed to official and private creditors.