By Sean Carney (Dow Jones Newswires, 18.7.2012)
The Czech central bank should keep monetary policy stable for the remainder of the year because another cut would have virtually no effect on the real economy with market rates already at historic lows, a member of the central bank's monetary policy board said Wednesday.
"Through 2012, in my point of view, I see no reason to decrease the rates," Kamil Janacek told Dow Jones Newswires in an interview. "We have very little space, almost no space now to cut rates further," Mr. Janacek said.
In June, after three consecutive quarters of economic contraction and amid an absence of domestic inflationary pressures, the central bank for the first time in more than two years adjusted its interest rates with a 25-basis-point cut.
The benchmark rate is now at the historic low of 0.5%.
Mr. Janacek, among the three members of the seven-strong board to vote for no change, said he still prefers stable rates.
Nominal interest rates for households, primarily for mortgages, and rates for corporate borrowing are at historically low levels while at the same time banks are willing to lend.
Mr. Janacek said the problem is that real wages are falling and export demand is weakening, so despite the current low borrowing costs households and businesses are being prudent and saving instead of choosing to take on debt or invest.
"The biggest barrier is a lack of domestic demand and uncertainty in the European Union, uncertainty of future demand for Czech exports," he said.
As a result, there are "very few monetary instruments to help the economy. Quantitative easing in this situation would have no effect."
But Mr. Janacek said it is important to consider the psychological impact of the central bank's recent monetary easing.
"Our steps have a psychological effect in the short run rather than a real effect," Mr Janacek said.
"From this point of view I understand my colleagues who voted to cut rates. As a central bank you ought to show you are prepared to react in all situations to help the economy recover."
While the central bank's benchmark rate moved from the erstwhile historic low of 0.75% to the new low of 0.5%, market rates are virtually unchanged, despite commercial bankers being well aware of the central bank's intent to support the economy with loose monetary policy.
"My perception was and is that stable [low] rates can have the same effect," Mr. Janacek said.
The June rate cut may help a slight revival in the Czech economy next year, but a stronger recovery isn't likely until 2014, which as an election year will see the end of austerity measures, which should help revive consumer spending, he said.