By Peter Laca
Oct. 24 (Bloomberg)
Czech Rates Should Be Held Through March, Policy Maker Says
Czech interest rates should remain unchanged until the end of the first quarter to gauge the economic impact of the euro region’s sovereign-debt crisis, policy maker Kamil Janacek said.
The Ceska Narodni Banka bucked the trend of monetary tightening earlier this year as central banks across Europe increased credit costs to fend off inflation pressures. All seven board members voted to leave the benchmark two-week repurchase rate at 0.75 percent on Sept. 22, half of the European Central Bank’s main rate. It was the 11th consecutive meeting where the rate stayed at a record low.
An economic slowdown in the euro area, the main market for Czech exports, will probably keep the country’s growth below the central bank’s current forecasts this year and next, Janacek, said in an Oct. 21 interview in Prague. A potential deepening of the crisis may lead to a rate cut if it intensifies downside inflation risks, Governor Miroslav Singer said in September.
“With such strong uncertainties in the external environment as we’re seeing now, a wait-and-see policy approach is the most appropriate,” Janacek, 68, said. “I don’t see reasons for moving interest rates in any direction in the foreseeable future, meaning in the next two quarters.”
Central banks in the European Union’s eastern members are weighing faltering growth prospects against weaker currencies after tightening policy earlier this year. Monetary authorities in Poland left the seven-day rate unchanged for a third meeting at 4.5 percent on Oct. 6, while Hungary kept its benchmark rate steady at 6 percent for an eighth month on Sept. 20.
Koruna Gains
The Czech koruna has gained 4.5 percent so far this year, the best performance among 25 emerging-market currencies tracked by Bloomberg. The currency was 0.18 percent stronger at 24.925 to the euro as of 10:17 a.m. in Prague. The mid-price for forward-rate agreement locking in the three-month interest rate in six months was 1.09 percent today, compared with the three- month Prague Interbank Offered Rate of 1.16 percent.
The latest Czech central bank forecast from Aug. 4 sees interest rates rising from about the end of the year, though “several board members” said they may move in any direction in the future because of the uncertainty stemming from the sovereign-debt crisis, according to minutes from the Sept. 22 meeting.
‘Short Lived’
“I don’t think the developments in the economy warrant a further reduction in interest rates,” said Janacek, who voted for higher rates at four meetings this year before September. “Lower rates might not have a major impact on commercial interest rates and the lending policies of banks, while the signaling effect of such a move might be relatively short- lived.”
The central bank has maintained record-low borrowing costs as the government’s budget cuts constrained domestic demand and tamed inflation. The bank, whose mandate is price stability, had cut the main rate by 3 percentage points during the global economic crisis that sparked the worst Czech recession since the end of communism in 1989.
September inflation was 1.8 percent, below the central bank’s 2 percent target for a fourth month and 0.4 percentage points below the bank’s forecast for that month, mainly due to lower food prices.
A Czech economic recovery is dependent on EU demand for its products, which include Skoda Auto AS vehicles and car parts. The bloc purchases about 80 percent of Czech exports, with Germany alone accounting for a third.
Weakened Demand
Czech growth eased in the second quarter for the first time since a 2009 recession as a slowdown in the EU dented demand for exports and government austerity measures curbed domestic spending. Gross domestic product rose 2.2 percent in the second quarter from a year earlier, after expanding 2.8 percent in the first three months.
“It’s clear that any slowdown in economic dynamics in Europe, mainly in the euro zone, will negatively affect economic dynamics in the Czech Republic,” said Janacek, expecting net exports to remain the main driver of the economy this year and next. “My estimate is that this year’s growth will be slightly below 2 percent, and next year could be somewhere between 1.5 percent and 2 percent, depending on the pace of German growth.”
Real GDP may grow 2.1 percent in 2011 and 2.2 percent in 2012, according to the central bank’s outlook. The bank board will debate new forecasts at the next monetary meeting Nov. 3.
“Growth of around 3 percent may return in 2013 at the earliest,” Janacek said. “We can’t expect a return to growth levels of around 6 percent in the next three or five years.”
Janacek Wants Main Czech Rate to Remain Steady Through March
Czech interest rates should remain unchanged until the end of the first quarter to gauge the economic impact of the euro region’s sovereign-debt crisis, policy maker Kamil Janacek said. Following are comments Janacek made in an Oct. 21 interview in Prague.
On monetary policy:
“I don’t see a major risk of domestic inflationary pressures. External factors, which are clouded by uncertainty at present, are a much bigger risk.
‘‘With such strong uncertainties in the external environment as we’re seeing now, a wait-and-see policy approach is the most appropriate. I don’t see reasons for moving interest rates in any direction in the foreseeable future, meaning in the next two quarters. Obviously, this doesn’t mean that the bank won’t react quickly if there are shocks to the economy.
‘‘I don’t think the developments in the economy warrant a further reduction in interest rates. Lower rates might not have a major impact on commercial interest rates and the lending policies of banks, while the signaling effect of such a move might be relatively short-lived.”
On the economic outlook:
“With a high probability, there won’t be another recession, or a double dip, in the euro zone. However, we must prepare for a period of at least one or one-and-a-half years of very slow growth in Europe.
‘‘It’s clear that any slowdown in the economic dynamics in Europe, mainly in the euro zone, will negatively affect the economic dynamics in the Czech Republic.
‘‘Net exports will probably remain the main driver of Czech economic growth this year and next year. Investment demand appears to be slightly picking up too this year.
‘‘My estimate is that this year’s growth will be slightly below 2 percent, and next year could be somewhere between 1.5 and 2 percent, depending on the pace of German growth.
‘‘Growth of around 3 percent may return in 2013 at the earliest. We can’t expect a return to growth levels of around 6 percent in the next three or five years.
On Greece and the euro-area crisis:
‘‘Regarding Greece, the question now is not whether there is an organized default, but when it will come. And my opinion is that the sooner it happens, the better.
‘‘Greece won’t be able, in the next five years, to reduce its debt. What is needed now, is the creditors, sovereign and private, to agree on how large the haircut will be.
‘‘The countries in the euro zone must improve their public finances, and this will be costly and it will slow economic growth in Europe.
‘‘The main problem in the euro zone isn’t a lack of new rules. The problem is the failure to respect the existing rules. The first step that should be taken is an agreement that the existing rules will be respected and that there will be mechanisms enforcing them. The club called the European Union, and the club called the euro zone, must behave according to the rules.
On proposals for a financial-transaction tax:
‘‘Some proposals, such as the financial-transaction tax, are a risk to the competitiveness of the European economy. While there is a legitimate demand to recapitalize the banks from private sources, proposals calling for the introduction of the financial-transaction tax would put the financial sector at a disadvantage.
‘‘Attempts to create pan-European regulatory bodies, making decisions but leaving the responsibility with the national regulators, could be a path to hell.
‘‘Initiatives that would leave potentially high costs of such decisions to individual countries must be vehemently opposed.
On perceptions of the Czech Republic:
‘‘Investors’ perception of the Czech Republic, relative to other countries, has changed since the time after the collapse of Lehman Brothers. Investors are now distinguishing between countries, which can be seen in the different market impact of shocks on Czech Republic and Hungary, for instance.
‘‘That said, I don’t expect the Czech koruna to become a safe-haven currency similar to the Swiss franc.
‘‘The Czech financial sector is healthy, well-capitalized and prepared to absorb shocks similar to that seen after 2008. The total exposure of the banking sector to Greece, Italy, Spain, Portugal and Ireland combined is around 28 billion koruna. Even if all of those assets were written down at once, it would merely reduce the profit of banks and wouldn’t affect their basic capital.
‘‘The banking regulations ensure that foreign owners of banks incorporated in the Czech Republic may not drain liquidity out of their subsidiaries and thus affect their health.