By Peter Laca (Bloomberg 20.1.2012)
The Czech central bank shouldn’t cut interest rates further and doesn’t need to tighten policy in the “near-term” given the lack of domestic inflationary pressures in the economy, board member Pavel Rezabek said.
The Prague-based Ceska Narodni Banka has kept the benchmark rate at a record-low 0.75 percent, a quarter-point below the European Central Bank’s main rate, since May 2010 as policy makers weighed a slowing economy against accelerating inflation at the last meeting on Dec. 21. The Czech economic outlook is clouded by the debt crisis in the euro area, which takes about 70 percent of the country’s exports.
The economy is deviating from the bank’s baseline forecast from Nov.3 that had assumed a decline in interest rates and is converging with the alternative outlook which saw stable rates, Rezabek said in an interview in Prague yesterday. Rezabek, who has voted with the board’s majority to keep the rates stable since the last change, said he isn’t in favor of a further loosening of monetary conditions.
“Tightening monetary conditions doesn’t seem warranted in the near term either given the fact that demand pressures are curtailed by the economic situation abroad,” Rezabek said.
“I’m not concerned that more significant pressures would arise and spark an increase in interest rates in the near-term.”
Policy makers across east Europe face resurgent price growth due to weakening currencies and the worsening economic outlook in the euro region, their biggest export market, which may be nearing a recession under the weight of its debt burden and government austerity plans.
Czech rates may stay stable through 2012 barring a “surprise” buildup of inflationary pressures in the domestic economy, central bank Governor Miroslav Singer said in an interview on Jan. 18.
Contracting Economy
The Czech economy shrank 0.1 percent in the third quarter from the previous three months, the first quarterly contraction since a 2009 recession. Gross domestic product growth slowed to
1.2 percent from a year ago in the July-September period, from 2 percent in the previous quarter.
Inflation was 2.4 percent in December, slowing from a 3- year high of 2.5 percent in the previous month while remaining above the central bank’s 2 percent target for a third month.
Inflation may have been influenced by prices rising ahead of the increase in the lower value-added tax bracket at the start of 2012, with domestic demand-driven inflation pressures absent, according to minutes from the December policy meeting.
“Inflation expectations are well anchored in the Czech Republic, and even the VAT increase hasn’t changed that,” said Rezabek. “Given the fact that inflation expectations are well anchored, there is no reason to react with monetary policy.”
‘Sharp Slowdown’
The central bank’s baseline forecast sees the koruna at 23.1 to the euro, GDP rising 1.2 percent and the three-month Prague interbank offered rate averaging 0.9 percent. The bank also prepared an alternative scenario that sees a “sharp slowdown” in the euro area’s economic growth this year, which would result in a 0.4 percent Czech GDP contraction.
This outlook also sees a weaker koruna and the Pribor rate at 1.3 percent on average. The three-month Pribor was 1.17 percent today.
The koruna has lost 1.3 percent to the euro in the past three months, the second-worst performance, after Hungarian forint, among 25 emerging markets currencies tracked by Bloomberg. The koruna weakened 0.3 percent to 25.374 to the euro as of 10:58 a.m. in Prague.
“Factors mentioned in the alternative forecast scenario appear to be materializing, including assumptions of relatively weak demand in the Czech Republic and the impact of problems in some more developed countries in Europe,” said Rezabek. “There is also the assumption of lower growth compared with the baseline scenario.”
Troubled Countries Should Sell Property
European Union countries experiencing economic difficulties should sell state property as part of efforts to overcome their troubles, Czech central bank board member Pavel Rezabek said.
Rezabek commented on Europe’s debt crisis, Czech economic developments and the outlook for interest rates in an interview in Prague yesterday.
On Europe’s debt crisis:
“Europe has been taking steps for some time that are eroding its competitiveness. These steps include environmental measures, such as a precipitous shift away from nuclear energy, that are pushing energy prices up. We are not talking about catastrophic scenarios, but it’s difficult to be optimistic about Europe’s future.
“There is a risk that measures from the past few years are effectively pushing economic activity away from Europe, and that is a key problem.
“When some countries in eurozone have problems, then I would assume that they will first use their own resources to solve these problems. These countries own significant amounts of state property and this property can be sold off. Even the Greek government has a significant role in the economy as an owner, and there hasn’t been a major change in ownership there.
“We shouldn’t be debating loans to some countries when we see how much property these countries own. They weren’t able to conduct responsible policy, so they should lose the right to manage this property and it should be sold off to other owners.
“It has been clear for more than two years that Greece has no chance to repay its debts. I would stick to an old bankers’
rule that says that one shouldn’t throw good money after bad.
“Leaving the eurozone and even a 100 percent haircut on debt to private investors wouldn’t be a solution for Greece.
Institutional investors would have to forgo part of their loans as well.
On Czech economy, interest rates:
“Factors mentioned in the alternative-forecast scenario appear to be materializing, including assumptions of relatively weak demand in the Czech Republic and the impact of problems in some more developed countries in Europe. There is also the assumption of lower growth compared with the baseline scenario.
“Lower growth would be primarily caused by the impact from external environment as the Czech economy is largely dependent on exports.
“We can hardly expect demand-driven inflationary pressures because upward pressures on wages aren’t appearing and the government’s austerity policy in state spending is also reducing demand.
“The cost impulses may fade away too due to weakening demand globally, so this shouldn’t generate significant inflationary pressures in the near term.
“Inflation expectations are well anchored in the Czech Republic and even the VAT increase hasn’t changed that. Given the fact that inflation expectations are well anchored, there is no reason to react with monetary policy.
“I’m not in favor of a further loosening of monetary conditions because it is not necessary to act at the moment and also the market rates did not follow our previous moves all the way.
“Tightening monetary conditions doesn’t seem warranted in the near term either, given the fact that demand pressures are curtailed by the economic situation abroad. I’m not concerned that more significant pressures would arise and spark an increase in interest rates in the near-term horizon.’’