By Peter Laca (Bloomberg 15. 3. 2016)
It’s far from a given that the European Central Bank’s smaller counterparts will follow Mario Draghi’s lead in delivering new monetary stimulus, according to Czech policy maker Mojmir Hampl.
“There’s no automatic reaction in the sense that central banks in small economies must automatically follow decisions of central banks in big economies,” Hampl, vice governor at the Czech central bank, said in an interview in his office in Prague on Monday. “We are making autonomous decisions to fulfill our mandate. In this context, I don’t see a reason to loosen policy further now.”
Monetary policies are diverging across Europe in the wake of the ECB’s moves last week that brought its interest rates to record lows, expanded asset purchases and offered a borrowing subsidy to lenders. Denmark’s central bank ignored the ECB cut and left its benchmark unchanged, while Romania said developments in the euro area won’t deter its plans to begin policy tightening.
As the ECB intensifies its fight to prevent the 19-nation currency union’s lackluster economy from slipping into a deflationary spiral, its counterparts in the Czech Republic are under less pressure to follow suit. While Czech headline price growth rate remains below the central bank’s target and disinflationary pressures from abroad are creating “relatively strong mid-term risks,” the structure of domestic inflation reveals that the demand-driven price growth is developing in line with expectations, according to Hampl.
Economy, Inflation
The Czech central bank has long grappled with competing economic forces – one of the fastest economic expansions in the European Union and cheap commodities keeping inflation well below its 2 percent target. Policy makers have repeatedly intervened in the market to prevent koruna appreciation and pledged not to scrap their regime of limiting currency gains before 2017.
“If I were to consider a further easing of monetary conditions, then I would have to see a worsening of the fundamental picture -- the macroeconomic picture, monetary picture and demand picture,” Hampl said. “And I have to say that’s not what I’m seeing now.”
Easing Wagers
Investors in interest-rate derivatives are betting on Czech borrowing costs dropping below zero after the central bank’s board on Feb. 4 discussed negative rates as a possible tool if more policy easing were needed. Forward-rate agreements fixing future funding costs show investor expectations that the benchmark rate will be cut by about 17 basis points by end-2016 from current 0.05 percent. That compares with bets on as much as 26 basis points of easing before the ECB’s decision last week.
The Czech koruna has hovered at a level just weaker than the central bank’s limit on its gains, defined as “near” 27 per euro, for four months. It traded little changed at 27.041 against the euro as of 9:12 a.m. in Prague on Tuesday.
Hampl said negative rates wouldn’t be an efficient tool for the Czech economy, adding that he’d prefer using the foreign- exchange instrument if more loosening were needed.
“The advantage of the foreign exchange commitment is that it’s automatic and unlimited,” he said. “In our economy, negative rates wouldn’t only deliver very little impact, but they also carry many risks, side effects and potential costs.”