By Peter Laca (Bloomberg, 27 July 2011)
Czech policy makers may be able to delay raising interest rates as the euro area’s debt crisis lowers the outlook for borrowing costs in the region, said Vladimir Tomsik, a central banker in Prague.
Money "market rates are affected by the debt problems in some euro countries and this has pushed the Euribor outlook down," central bank Vice Governor Tomsik said. "This may be one of the reasons for some delay in raising interest rates in the Czech Republic." Euribor is the euro interbank offered rate.
The first increase in the record-low 0.75 percent two-week repo rate since 2008 may not happen until next year, Tomsik said in an interview on July 25. Accelerating Czech economic growth being driven by exports, rather than domestic consumption, also limits pressure for higher rates, he said.
The Ceska Narodni Banka has kept the benchmark rate unchanged as policy makers across Europe raised interest rates to curb inflation. The European Central Bank increased borrowing costs for a second time this year in July, raising its main rate to 1.5 percent, widening its spread above the Czech rate, which may make the eastern European country’s assets less attractive to investors.
Forward rate agreements locking in three-month euro-area interest rates in nine months time dropped to 1.8 percent as of today, from 2.1 percent on May 5, when the Czech central bank published its latest economic forecasts, according to data compiled by Bloomberg.
Eastern Rates Rise
Rising inflationary pressures have prompted central banks across Europe to boost borrowing costs this year. Poland has increased the benchmark rate by one percentage point to 4.5 percent since January, while policy makers in Hungary raised the main rate to 6 percent by January from 5.25 percent in November.
The Czech central bank’s May forecast signaled interest rates may rise as early as in August, said Tomsik, 37. Rate setters in Prague will meet on Aug. 4 and publish new forecasts as they debate when to tighten monetary policy. The central bank will probably raise its estimate for 2011 economic growth to about 2 percent from 1.5 percent, Tomsik said.
“Until now, we have said the turning point may come in the third or the fourth quarter,” Tomsik said. “But in the current situation, when I consider the effect of the lower outlook for the euro-area’s market rates, the turning point may be pushed back.”
Investors’ Rate Bets
Investors scaled back bets on higher Czech interest rates, with forward-rate agreements locking in three-month interest rates in six months dropping to 1.46 percent as of 9:02 a.m. in Prague from 1.62 percent on May 5. The forwards locking in three-month rates in nine months dropped to 1.58 percent from 1.60 percent yesterday.
Gross domestic product will probably grow faster than the bank predicted two months ago as German economic expansion boosts demand for Czech products including Skoda Auto vehicles and car parts.
The latest GDP outlook was based on an assumption of about 2.5 percent economic expansion in Germany, which buys about half of Czech exports to the euro area, said Tomsik, who has voted with the board’s majority to keep the main rate stable at all meetings since September while at least one policy maker backed an increase.
‘Taming Inflationary Pressures’
“As Germany is now forecast to grow one percentage point faster, that means the Czech economy should grow about a half- percentage point faster,” he said. “The question I’m asking is whether this higher growth is pro-inflationary or not.” Growth is driven by exports, “which is supporting koruna appreciation and thus taming inflationary pressures.”
The central bank’s models use an analyst consensus forecast for German growth, he said.
Czech inflation unexpectedly slowed in June to less than the central bank’s 2 percent target, dropping to 1.8 percent from 2 percent in May. Consumer-price expectations are now “well-anchored,” Tomsik said, adding that inflation stripped of the impact of an expected increase in the value-added tax rate will probably remain near the bank’s target.
Czech policy makers have shown differing views on inflation risks, with some saying economic recovery may stoke price pressures and that warrants higher borrowing costs now. Two policy makers voted for a quarter-point rate increase on June 23.
“I can’t rule out the turning point will come this year, nor can I rule out that it will come next year.” Tomsik said.
“With the degree of uncertainty we’re facing at the moment, nothing can be ruled out.”