By Jana Mlčochová (Reuters 23.7.2013)
* Sees no positive impulses to help economy turn around
* Current CZK rate likely not weak enough to offset weak environment
- Czech monetary policy appears to be too tight as the recession-hit central European economy does not seem to be getting the external stimulus it needs to turn around, a central banker said.
The Czech Republic's heavily export-reliant economy has not grown since mid-2011. While the bank officially expects a gradual rebound in the second half amid a revival in Europe, there is no sign that such an improvement will come, Lubomir Lizal told Reuters in an interview.
"I think that monetary conditions are perhaps overly tight with regard to how the situation in Europe is panning out," he said. "(Our) present forecast includes an assumption of a revival in Europe, but this revival is not coming, however."
The central bank cut borrowing costs to near zero in November and has been debating whether to weaken the crown currency as a way to ease monetary conditions further.
Minutes of the June meeting showed the seven-member board was split. Some called for immediate crown-selling operations after a decade out of the currency market, but they remained in the minority. Lizal declined to say whether he was one of them.
Czech exports are equivalent to 80 percent of the country's overall output, and 60 percent of those exports are shipped to the euro zone.
The single currency bloc's economy shrank by 0.2 percent in the first half and industrial output fell in May for the first time in four months, indicating a fragile and uneven recovery.
Czech exports, mainly made up of cars and car parts, have been shrinking on an annual basis since December, with the exception of April, as demand from Europe faltered.
"I am afraid that bouncing along the bottom of the economic cycle may be protracted," Lizal said on the Czech economy.
He pointed to the euro zone lagging behind the United States where the Federal Reserve signalled ending to its policy of quantitative easing (QE) whereas in the euro area there have been no debate of unwinding non-standard policy measures.
The prospect of ending the Fed stimulus is causing an outflow of funds from emerging markets and is prompting emerging market central banks to reverse loose policies.
But Lizal said that was no reason for the Czech bank to change tack.
"I do not expect any major influence or reaction in the crown. For us, Europe and the state of the domestic economy is determining. The influence from overseas is very mediated and hence smaller."
Central bank Governor Miroslav Singer also said he expected to ease rather than tighten monetary policy, telling Bloomberg in an interview on Tuesday that he would not mind "monetary conditions being significantly relaxed."
INFLATION IN FOCUS
Minutes from the June session also showed some on the board thought a risk of sustained deflation was a necessary condition for further easing via currency intervention.
But Lizal said he was concerned already about the fact that the bank has been undershooting its inflation target set at 2 percent with a 1 percentage point "tolerance" corridor on either side.
Headline inflation was 1.6 percent in June, accelerating from 1.3 percent in May.
Lizal said he was watching monetary policy-relevant inflation, which excludes the primary effects of changes in indirect taxes, which has been below 1 percent since February.
"If monetary policy inflation is below the tolerance band, it is a signal for me that it is necessary to seriously consider whether monetary conditions are too tight."
The crown, with its average exchange rate versus the euro in the third quarter at 25.95, is weaker than the bank's forecast of 25.60, helping propel price growth through more expensive imports.
But Lizal said that even with the current, weaker rate, further easing may be needed.
"My feeling at the moment is that the economic situation is not evolving so well that this would be enough."