CZECH CBANK VICE GOV HAMPL SAYS ANTI-INFLATIONARY RISKS ACCUMULATING
CZECH CBANK'S HAMPL SAYS COULD SEE SOFTER MONETARY CONDITIONS IF RISKS INCREASE
CZECH CBANK'S HAMPL SAYS CZECH CROWN "RATHER A REGIONAL STAR THAN A GLOBAL STAR"
By Michael Winfrey and Robert Muller
PRAGUE, Sept 13 (Reuters) - Anti-inflationary risks are accumulating in the Czech economy and if they increase the central bank could even move towards looser monetary conditions in the coming quarters, central bank Vice Governor Mojmir Hampl said.
Last month, the central bank pushed back an expected rise in rates from a record low 0.75 percent from Autumn to the turn of the year, and since then some members of the seven-member policy board have suggested an even softer stance.
Hampl judged those comments as "more than appropriate".
He also said he could not exclude any type of move in the future, citing a rapidly changing situation in global financial markets and signs demand is weakening at home and abroad.
"If we go without any interruption from abroad, without any bad news from abroad, nothing very much has to happen," Hampl told Reuters in an interview on Monday.
"But should there be any additional risks, then I said I might imagine many things in the area of monetary policy ... including even the necessity for softer monetary conditions so that we are able to achieve our targets."
Inflation in the Czech Republic stayed flat in August at 1.7 percent. It was 0.4 of a percentage point below the central bank's expectations and under the mid-point of its target of 2 percent plus or minus one percentage point.
Hampl's statements ventured slightly further than those of central bank Governor Miroslav Singer, who said last week that downside price risks had become more pronounced and could lead the bank to postpone rate hikes.
Arch hawk Eva Zamrazilova -- who had voted for rate hikes since last September -- also suggested this month she might not do so again at a Sept. 22 policy meeting given the uncertainties clouding the economic outlook.
Hampl added that indications from the European Central Bank that it had halted a cycle of interest rate rises begun five months ago due to intensifying downside inflation risks could also have an affect on Czech rates.
"This factor is heading in an anti-inflationary direction, or the direction of rather lower than higher rates in the Czech Republic ... from the rate trajectory in the latest forecast," he said.
AUSTERITY BITES
Hampl said a main area of anti-inflationary risks was the Czech domestic economy, where consumers have been on the defensive due to persistently high unemployment and government measures to slash the budget deficit.
The austerity-minded cabinet has targeted a public finance deficit of 4.2-4.6 percent of gross domestic product for this year and 3.5 percent in 2012, with the ultimate goal of a balanced budget in 2016.
One of its measures -- designed in part to help offset a bill that will introduce private pension savings to bolster the current publicly-funded pay-as-you-go system -- is to hike the lower of the two Czech sales tax (VAT) rates from 10 to 14 percent next year and to 17.5 percent in 2013.
Prime Minister Petr Necas has said the government could raise it all the way to 19 percent if the revenue outlook darkens.
Hampl said such a move -- if approved by deputies -- could have a "substantial" effect on demand.
He added that mounting pressures on domestic demand and the external environment, as well as factors surrounding the financial sector in the euro zone, could bring even more budget consolidation steps by the government.
That, in turn, could weaken demand further and squeeze inflation to a point that could potentially need a policy response.
"For me, these consolidation efforts are more than welcome. It is absolutely necessary to do something on this front," he said. "But these efforts might mean also subdued demand pressures and it also might mean more room for not stricter but rather weaker monetary policy in the months or quarters ahead."
The Czech economy grew 0.1 percent in the second quarter from the previous three months, and by 2.2 percent year-on-year, a marked deceleration from the first quarter.
Hampl said a new quarterly inflation forecast, a key driver for policy to be released at the bank's November meeting, would probably reflect a weakening global picture.
He did not give details but said he would be surprised if the outlook for growth were to improve. The bank's August forecast predicted 2.2 percent expansion in 2012.
"First, it seems to me that it's not ruled out that the domestic demand pressure will be rather weaker than previously assumed," Hampl said.
"Second, let's not forget about the international environment. Obviously the situation on financial markets and also in the real economy in the countries surrounding us, in the euro zone especially, is rather dire."
He added that, while the Czech crown had enjoyed relative stability when compared with its regional peers, he did not agree with some investors who have suggested the currency could emerge as a new safe haven from global market turmoil.
"I would say that the Czech koruna is a star, but rather a regional star than a global star," he said.
"The Czech koruna is not the Swiss franc."