By Sean Carney (Dow Jones Newswires, 25.1.2012)
Czech interest rates should be left unchanged for now as the country's central bank tries to balance a rising U.S. dollar with a disinflationary domestic economy, a Czech central banker said Wednesday.
Political risk and market volatility in Hungary as well as weakness in the euro zone also have a negative influence on Czech assets, though both those factors should be limited in scope, Kamil Janacek told Dow Jones Newswires in an interview.
I would prefer no changes in rates" at the Feb. 2 policy meeting, Janacek said, adding that rates can remain low as long as they don't have an adverse effect on the country's economy.
The central bank's benchmark rate has been at the historic low of 0.75% since May 2010.
Very low growth of nominal wages and economic stagnation at home paired with falling euro-zone demand for imports are disinflationary pressures offset by rising crude oil prices and the koruna's weakness against the U.S. dollar.
Everyone is talking about the koruna's exchange rate to the euro, but as far as import of raw materials is concerned, it's the exchange rate to the U.S. dollar that's very important," Janacek said.
The koruna was near its strongest levels of 2011 in September. Since then it has weakened 5.5% against the euro but 20% against the dollar, making commodity imports more expensive while weighing on exports, the driver of the local economy.
While some analysts predict a recession this year, Janacek said he personally forecasts the Czech economy to grow between 0% and 0.5% annually this year followed by a rebound in domestic demand fueling 2013 growth of between 1.5% and 2%.
He said he believes Germany, which accounts for a third of Czech exports, won't fall into recession.
Another risk is foreign-exchange volatility as investors lump the koruna and Polish zloty in the same basket with Hungary's forint.
The forint weakened sharply in late 2011 amid controversial Hungarian political policies, hitting the koruna, though euro weakness against the dollar also weighs on the Czech currency, he said.
Investors only later will differentiate more between the forint and the koruna and zloty, and that will allow the koruna to return to its long-term trend of appreciation, Janacek said.
But koruna firming will slow to between 2% and 2.5% to the euro annually going forward from roughly 4% in past years as the Czech economy has largely converged with Western Europe and room for foreign-exchange gains will shrink, Janacek said.