By Jana Mlčochová (Reuters 29.10.2013)
- Way to unwind potential CZK sales not quite clear
- Wrong exit strategy could shake FX, hit economy
- CPI to fall below 1 pct, but no imminent deflation threat
Czech central bank board member Kamil Janacek says he is "very cautious" about using currency interventions to further ease monetary conditions because he is not certain how to get out of it once its started.
He told Reuters in an interview he believed he was not the only one on the central bank who felt this way.
The bank's seven-member governing board has been debating whether to launch crown sales because it has little to no room left for further direct monetary policy cuts and because inflation has fallen far below target.
But the panel has been split over whether to start using the intervention tool.
"The problem is not to launch currency interventions," Janacek said in remarks cleared for publication on Tuesday. "The problem is that once you start this process you must have an idea how to get out of it, meaning an idea about an exit. For now, I do not have a quite clear idea (about that)."
He said a wrong exit strategy could cause a shock to the Czech Republic's highly open economy by causing wild currency swings or an abrupt crown appreciation.
"I think I am not alone on the banking board with this concern," he said.
The economy rebounded in the second quarter from a six-quarter long recession thanks to rising foreign demand for its industrial goods, such as Skoda cars.
Despite the revival, inflation has been subdued. It slowed to 1.0 percent in September, exactly the bottom of the bank's 1 percentage point tolerance band around its 2 percent target.
Monetary policy-relevant inflation, headline price growth adjusted to exclude the primary impact of changes in indirect taxes, was 0.2 percent, deeply below the tolerance band.
Stiffening competition and falling global power prices have prompted major energy providers such as CEZ, RWE and Prazska Energetika to announce cuts in electricity rates by 10-19 percent as of next year, while gas rates are expected to fall by single percentage points.
The bank is due to release a new macroeconomic outlook at its next meeting on November 7 which should reflect the announced energy cost cuts.
NO DEFLATION
Janacek said he did not see an imminent threat of deflation for the time being though it was highly likely inflation would slow to below 1 percent in the coming months.
But he said he would prefer a short period of shallow deflation over the risk that currency interventions, if deployed without a clear plan of an exit, would cause shock to the economy.
"That's the main reason that makes me very cautious and is the reason for which I might as well tolerate deflation in tenth of a percent over 2-3 months."
But he also said if deflation last for "several-few months" and was coupled with signs the economy was falling back to a recession he would support interventions. Also a change in inflation expectations, that are now well-anchored close to the bank's target, would be an argument in favour of interventions.
"While deciding, (I always weigh) a whole mix of different factors and conditions, it definitely does not depend on one factor."
He repeated the bank's official stance that the likelihood of interventions was high and the board was ready to launch them.
"The possibility that the economy could get near a deflation situation is... much closer than it would be if inflation was above 2 percent."
The Czech Republic held a general election on Oct. 25-26 that could usher in a centre-left cabinet but negotiations to form a government will be tough as favourite centre-left Social Democrats have been crippled by a revolt, after garnering much weaker support than expected.
Janacek said the election or its result could not change any of his views on monetary policy setting.