(Reuters, 8.12.2000)

INTERVIEW-Czech c.banker says CPI pressures subdued.

PRAGUE, Dec 8 (Reuters) - Czech November consumer price data confirm inflationary pressures are subdued and show there is no need to tighten monetary policy now or in the very near future, central bank Vice-Governor Ludek Niedermayer said on Friday.

"So far we are not seeing the classic demand-driven inflation, which will probably revive a bit in some phase of the (economic) recovery," Niedermayer told Reuters in an interview, adding that recent price growth was driven mainly by imports.

The Czech Statistical Bureau released November data showing month-on-month inflation was 0.1 percent, putting the year-on-year rate at 4.3 percent. Net inflation - headline inflation stripped of the effects of state controlled prices and taxes - was 0.1 percent, with the yearly rate at 3.4 percent, just below the central bank's target range of 3.5-5.5 percent.

Asked if consumer demand shows that monetary policy may need change, Niedermayer said: "I see no reason now to have any large worries for several months ahead and I think today's figures confirm that."

"The situation really doesn't look bad and the discussion that would be needed to change monetary policy or flag tightening of interest rates soon is not on the table. But that does not mean we don't learn something else in the following months, for example wage negotiations will be a signal."

(C) Reuters Limited 2000.

INTERVIEW-Czech c.bank less concerned over crown strength.

By Jan Lopatka (Reuters, 8.12.2000)

PRAGUE, Dec 8 (Reuters) - The Czech central bank (CNB) is less concerned over the strength of the crown currency as the country's economic recovery grows more robust, CNB Vice-Governor Ludek Niedermayer told Reuters in an interview on Friday. While the CNB used to act against crown strength it stayed on the sidelines during a recent surge and Niedermayer said the currency's strength could also help put a cap on inflationary pressure which may come with the reviving economy and wages.

He added that inflation so far was in check, but warned faster wage growth could lead to price pressures in non-tradeable areas such as services.

In that case, the strong currency, which has been supported by inflows of foreign direct investments related to privatisations and greenfield projects, could prove useful.

"Then there will be the question if the optimal solution lies in that the crown remains strong," Niedermayer said.

"And the possibility that the non-tradeables (prices) grow a bit more and the tradeables, influenced by a relatively strong exchange rate, offset it, is in order," he said.

He said the central bank has been operating with nominal wage growth of about six percent next year in its forecasts, but the unions are demanding an increase of at least 10 percent, arguing this is justified by productivity gains.

The central bank had previously been worried by the impact of crown strength on growth and intervened against the currency in March, when it stood at 35.6 to the euro.

The crown has since firmed significantly, reaching highs of 34.2 last month as the euro fell against the dollar, before dropping back to Friday's 34.88.

MARKETS WANT STABLE, RELATIVELY STRONG CROWN

Niedermayer said market participants shared the view the currency should be stable and "relatively strong" next year, and the central bank had to respect the overall development while watching out for sudden swings.

"We can influence the exchange rate through interventions and interest rates, but the possibility is limited. The rate develops in the logic of the macroeconomic development, and that must be understood," he said.

"Even if we come to the opinion that a better mix would be, let's say, a weaker exchange rate and very slightly higher interest rates, the implementation of such policy - intervening on the forex to be able to raise interest rates by quarter of a percentage point - would look very non-credible and as some desperate, not understandable fine-tuning."

Asked if he shared the view of some analysts that the bank would be happy to tolerate the crown's strength against the euro, Niedermayer said:

"Partially it is true, but on the other hand you saw that in the case of (recent purchase of government's euros into forex reserves) we decided to choose a solution equal to an intervention for a weaker crown, so I would say that the strong crown is a good thing but it should not be overdone."

The central bank told Reuters last week that it had bought 250 million euro of government privatisation proceeds into its reserves last month, which amounted to an indirect intervention.

But Niedermayer said other factors also played a role in the decision, such as the saturation of the market after a previuos large transaction, the need of the state to get Czech currency fast, and tighter liquidity on the market as the year end nears.

Niedermayer also said that latest inflation data showed there was no need to tighten the key repo rate right now. The rate has been flat at 5.25 percent since November 1999. Most analysts expect some tightening in the first half of next year.

Niedermayer also said growing public deficits, which the central bank has repeatedly criticised as unsustainable, were putting pressure on the yield curve, which in turn pressured the central bank's rates, and saturated the bond market.

Demand has been good in recent auctions, but potential stresses from abroad, connected with jitters in the emerging markets, could at times make things difficult, he said.

But he said the government should not borrow abroad, unless domestic costs rise excessively.

(C) Reuters Limited 2000.