Bradley Gardner (Czech business weekly, 19.3.2007, page: 12)
A weighty message was wrapped up in a March 8 package of inflation targeting and monetary policymaking changes announced by the Czech National Bank (ČNB)-by 2010 no more structural changes to the economy will be required. Instead, says ČNB board member Mojmír Hampl, the country should prepare to sustain 'continued convergence.'
Reaction to the ČNB changes was swift and mixed. The announced shift in the annual inflation target, reducing it from 3 to 2 percent starting 2010, provided grounds for much debate as to whether the central bank was giving the government an ultimatum on the pace of reform, and whether the central bank is right to be treating the Czech Republic as a developed economy. Many analysts also raised anxieties that the inflation change would require an undue rise in interest rates.
Hampl, who joined the ČNB board in December 2006, said he was one of the board members instrumental in pushing for the series of changes. He argued that the lower inflation rate-the rate that the bank associates with the end of inflationary pressures related to the transition economy-will encourage faster growth after 2010 at no economic cost.
The ČNB also announced that, starting 2008, it will publish a rollcall of how board members voted whenever there's a vote on interest rate changes. Furthermore, it said it intends to publish its Monetary and Statistics Department's interest rate forecasts, while monetary policy meetings will be reduced from 12 to eight times a year (see 'Mixed reaction to rates, inflation transparency,' CBW, March 12, 2007). Hampl said greater transparency at the bank is something everyone should be pleased with. Of the analysts surveyed by CBW, some welcomed the increased transparency, while others said it will provide nothing analysts don't already know, and may put unwelcome media pressure on certain board members to conform to majority opinion.
* Q: The press release announcing the changes to the central bank's policies stated that a 2 percent inflation level by 2010 is a manageable target because most of the transformational changes to the economy will have been completed. Does this statement signify the bank asserts that the Czech Republic will be considered a developed economy in less than three years?
A: One year ago when World Bank President Paul Wolfowitz was in Prague he declared the Czech economy a developed economy. We simply believe that after 20 years of transition, the Czech economy and Czech economic policy won't face any [more] substantial transition changes, like privatizations and structural changes to the economy. We strongly believe that by 2010 the deregulation of prices will be over and the harmonization of taxes [with the rest of the EU] will be basically over. We suspect some new indirect taxes will appear-green or ecological taxes -and that the process of implementing these taxes will start from the beginning of next year, but we believe this process will be over by 2010, and there will be no more structural changes to the economy any more, just continued convergence.
* Q: Do you include pension and welfare in the reforms you expect to be completed by 2010?
A: Pension reform and welfare reform aren't topics only for a transition economy; they're issues for the entire EU. They're issues where the EU needs to not lag behind Asia and America. To remain competitive and to solve the demographic bottleneck, the EU will probably have to do something with the welfare system, and will definitely have to do something with the pension system, but I personally do not expect the target change to be a major issue for the government.
* Q: But the Czech economy's welfare payment level is unusually high; will this be more of a challenge for us?
A: Yes [welfare payments are high], and unfortunately comparable [to the rest of the EU].
* Q. Several analysts said lowering the inflation target shows a commitment to achieving the Maastricht criteria. Is this true?
A: Easier fulfillment of the Maastricht inflation criterion is definitely not the key reason for altering the target; rather, it's a 'sweet side effect.' The key reason is that after 20 years of transition it's reasonable to adjust the desired level of inflation to the standard level in developed countries.
* Q: Some analysts have suggested the changed inflation target will require raising interest rates, at least during 2008 and 2009. How do you respond to that?
A: The ČNB believes nothing substantial is going to happen on this front. Inflation expectations are consistently low and well anchored in the Czech economy. Announcing a decrease in the inflation target well in advance means that we can decrease the inflation expectations. The economic agents will adjust in advance; they will expect lower inflation and act accordingly. We believe that if inflation goes down slightly, the rates will behave more or less the same without altering the target at all. The rates will definitely move in the future, but not due to the change of the target. Moreover, if you look at any economy in the world you'll see that the higher the level of inflation, the higher the nominal level of interest rates, and vice versa.
* Q: What else does the ČNB have to do-besides announce the new inflation target well in advance-for the target to be successful?
A: The economy is influenced by setting a credible target. So, the key feature of successful inflation targeting is that our targets are credible. We have low inflation anyway, so it won't harm the economy to adjust to a lower target. We strongly believe [hitting this target] will be basically costless because it was announced well in advance. At the end of the day, we won't have to push rates up because economic agents will have prepared for the lower rates, and will act accordingly.
* Q: We currently have the lowest interest rate in Europe [2.5 percent compared to 3.75 percent of the eurozone]. How long can we maintain this?
A: We say consistently that we believe interest rates will eventually go up. The question now is: When will the rates start rising? But what's important is the interest rate differential between the key rate in the European Monetary Union (EMU) and the Czech Republic. We may live for quite a long period of time with lower interest rates than the EMU, but the interest rates in the EMU will go up as well. In the long term [due to the new inflation target] we expect that even a lowering of rates relative to our core peers can't be ruled out.
* Q. One analyst I spoke with said this targeting change will keep Czech prices at around 60 percent of the EU norm. Do you agree with this?
A: No, prices could converge further through appreciation of the Czech crown. A slightly lower targeted level of inflation doesn't hamper price level convergence.
* Q: How much does the central bank expect the Czech crown to appreciate in order to assist with price convergence?
A: We try not to comment on the exchange rate because under a floating currency the exchange rate should be set by market prices, but the ČNB has often said we see a sustainable rate of real appreciation at around 3 percent per year. Maybe, and this is just a hypothesis, the Czech crown could appreciate at this rate for many more years. But this channel of real appreciation might well serve as a channel for price level convergence.
* Q: If after 2010, the Czech Republic is considered a fully developed economy, what will be necessary for the Czech economy to begin nearing the levels of similar-sized economies in the West, like Austria or Belgium?
A: We're not yet at this desirable point, but the key obstacles would come if we start applying all the European welfare standards we'd like to have before we are wealthy enough to pay for these standards. [The obstacles would emerge if] we would require the same level of nominal wages, social security and the same-sized welfare state before the economy is in the state that this will not harm future development. This is the point made by all the major economists calling for reforms in the Czech Republic. We aren't in the position to have unsustainable development in public finance, we're not in the position to have as inflexible a labor market as other European markets. ... We're not in the position of these developed economies yet.
* Q: How do you think publishing individual bank board members' votes might affect setting interest rates?
A: I believe that publishing the individual roll-call of policymakers on rates remarkably increases the transparency of the whole decision-making process. Individual votes reveal preferences of each policymaker, and the revealed track-record of individual members in sum makes the whole monetary policy body more predictable and accountable for the markets. Moreover, it enhances each member's individual, personal responsibility for monetary decisions. Each decision is, in fact, a decision of seven individuals, rather than the decision of some amorphous board. I can't see any reason not to do it.
* Q. Do you think that this will put pressure on individual bankers to act in a certain way and, if so, in what way?
A: No, I wouldn't expect that. I believe the bank board is a group of strong and independent personalities and the fact that our individual monetary decisions will be published isn't going to alter our individual behaviors in any way. There are different opinions on macro issues in every [governing or advisory] body in the world. Publishing the vote doesn't change that; it just makes the individual votes more transparent.
* Q. Some analysts say the main problem isn't that the attitudes of bank board members will be known, but that their opinions are so deeply at odds with one another.
A: It is quite natural that individual members' opinions on complicated macro questions sometimes do differ. But from 2008 on, I hope, there will be less speculation about these opinion differences on monetary issues.
* Q. A number of analysts said publishing the interest rate forecast from the bank's Monetary and Statistics Department could cause ČNB problems, because the board has often disagreed with the forecast. If such disagreement continues these figures will be useless to analysts and lower the central bank's credibility. Do you see these disagreements continuing?
A: The [projected] trajectory of implied interest rates isn't a commitment of the ČNB concerning the future development of interest rates. It doesn't mean the rates can't take a different pattern in the future compared to what's been published. Nobody can predict the future perfectly, and each prediction is subject to revisions, changes, uncertainties and risks. I think market analysts know this feature of each prediction quite well, so a deviation of an actual interest rate from the predicted one shouldn't diminish credibility. Moreover, the prediction is a prediction of the staff, not of the bank board. It's natural that the board's decisions might differ from what the staff proposes.
MOJMÍR HAMPL
Born: March 13, 1975, Zlín, South Moravia
Education: 2004, doctorate in public choice theory and macroeconomic policy, University of
Economics (VŠE), Prague; 2001 master's degree in energy policy, University of Surrey, U. K.; 1998,
bachelor's and master's degrees in economics and public administration University of Economics
(VŠE), Prague.
Work history: Since December 2006, member of the bank board, the Czech National Bank (ČNB);
2005-currently, member of the board of directors of the Czech Economics Society (ČSE); 2006, member
of the academic council of Škoda Auto University, Mladá Boleslav, Central Bohemia; 2004-06, member
of the board of directors, Czech Consolidation Agency (ČKA); 2002-04, senior analyst at bank Česká
spořitelna and financial analysis coordinator of Austria-based Erste Bank; 1998-2002, analyst,
senior analyst at ČNB.