By Jana Mlcochova (Reuters 26.10.2009)
Czech interest rates should stay flat until the global economy recovers as more easing would have a limited impact on market rates and could cause crown volatility, central bank board member Robert Holman said on Monday.
olman told Reuters in an interview that decision-making on rates was surrounded by an exceptionally high level of uncertainty related to risks to the bank's inflation forecast.
"Should I make a decision at a time of an increased level of uncertainty then I will always prefer stability in interest rates, rather then contemplating whether they should be changed in this or that direction," said Holman, who voted with a majority for stable rates at the last meeting on Sept. 24.
Czech borrowing costs are at a record low of 1.25 percent after rate-setters chopped 2.50 percentage points from the main two-week repo rate <CZCBIR=ECI> since August last year to prop
up growth while inflation pressures remained weak.
Holman's comments are in sharp contrast to remarks by Governor Zdenek Tuma and Vice Governor Miroslav Singer, who said earlier this month the bank would debate more policy easing.
They were two lone votes for a 25 basis point cut at the September meeting.
The Czech Republic was in recession earlier this year with consecutive quarter-on-quarter declines in gross domestic product in the last three months of 2008 and the first quarter of this year. However, its currency has recovered by 13.6 percent since this year's low, tightening monetary conditions.
The central bank said after the last meeting risks to its inflation forecast had shifted moderately to the downside due to the stronger than expected crown and lower-than-forecast inflation data.
Annual inflation was at zero in September, below the bank's forecast, and the bank said it could briefly dip below zero.
This is far below the bank's January 2010 target of two percent, with a tolerance band of plus or minus one percentage point.
But Holman said he could not say downside risks dominated.
"It's not the case that I would now say that we live in times of anti-inflationary risks and this is what worries us because that would mean that we should lower interest rates. I certainly would not say that."
He said the main pro-inflationary risks included development in wages and in prices of some commodities, namely oil.
He said he had not yet firmly decided how he would vote at the bank's next rate-setting meeting on Nov. 5, and must read the next situation report to make a final decision.
But it was better for the economy if rates were stable rather than often changed, he said.
Further rate-lowering could threaten crown stability, he said.
"Interest rates are so low that their further lowering could cause an unpredictable development of the crown," he said, pointing to foreign exchange markets reacting to interest rate differentials. "I would not like to see that by lowering rates
we would shake the exchange rate."
He said he was happy the crown had stabilised around 25.00-26.00 per euro level, which he said was appropriate.