By Jana Mlcochova and Jan Lopatka (Reuters 19.9.2012)
The Czech central bank should resist the temptation to use unconventional tools to boost an economy that is fundamentally sound, Vice Governor Mojmir Hampl said, highlighting differences on the bank's board ahead of a policy meeting next week.
But authorities do need to find a way of encouraging investment-shy households and companies to spend and borrow more, Hampl told Reuters in an interview.
The bank cut its two-week repo rate in June to a record low 0.5 percent, and markets are pricing in another quarter point cut at the bank's next meeting on Sept. 27.
Hampl - who voted with the majority for unchanged rates on Aug 2 and for a cut on June 28 - said he was not sure another cut would be the right step, but said he could not yet say how he would vote next week.
Central bank Governor Miroslav Singer said in a newspaper interview published on Tuesday the bank had stimulus measures in addition to interest rate cuts that it could use, including acting on the bond market.
Hampl said unconventional policy moves - such as those used by the U.S. Federal Reserve or the Bank of England - would be the correct medicine for economies suffering from unstable financial sectors, a fiscal crisis or a liquidity crunch.
But none of this applied to the Czech Republic.
"I do not feel like even debating some kind of unconventional measures because it seems to me that it absolutely does not correspond to the state of this economy," he said in comments made after publication of the Singer interview.
Consumers and businesses had turned excessively cautious, however, despite Czech fundamentals being "unbelievably healthy compared with both the west and the east (of Europe), whether in the financial sector or in the government (sector)," Hampl said.
In such a context, non-standard monetary policy tools might only make matters worse.
"When we talk about anything that is unconventional and abnormal, we are thereby indicating that there is something abnormal which needs an abnormal solution," he said.
"That, in my opinion, can... further strengthen all the negative mood."
Comments by policymakers highlighting the economy's health might work better, he said.
EBBING CONSUMER CONFIDENCE
Czechs are traditionally thrifty and the banking sector's loan-to-deposit ratio is around 70 percent compared with an EU 27 average of 103 percent.
But consumer confidence is at its lowest in 13 years [ID:nP7E8C901W], reflecting a government austerity drive aimed at cutting the public deficit below 3 percent of gross domestic product next year from an expected 3.2 percent this year.
The programme has impressed investors and rating agencies, driving Czech bond yields to record lows below those of some richer western developed economies, including Belgium.
But it also contributed to a recession that started in the final months of last year, and some economists say the cuts have been unnecessarily harsh as the country's debt is only just above 40 percent of GDP, around half of the EU average.
Hampl said he did not want to question the government's fiscal efforts, though companies and households had fewer reasons to feel the need for austerity.
"The government is the only one that has a real reason to put the brakes (on spending)," Hampl said.