ByJana Mlčochová (Reuters 20 July 2011)
Czech interest rates are likely to rise this year but a deepening of the euro zone debt crisis may delay the increase toward December, a central banker said on Wednesday.
The key Czech repo rate has been at a record low 0.75 percent since May last year as government austerity and sluggish wage growth have kept a lid on domestic demand.
The bank's May forecast implies a tightening from the start of the fourth quarter in anticipation of rising inflation pressures as economic growth picks up.
However, the escalating sovereign debt crisis in the euro zone is a major uncertainty that has clouded that outlook, board member Lubomir Lizal said in an interview.
"For me it has been a question of timing in the fourth quarter, whether it is going the be in the beginning or at the end," Lizal said.
"Before the situation in Italy unleashed it seemed that the moment of raising rates was coming closer. Now it seems that tightening is becoming more distant," he added.
Italy's assets experienced a severe sell-off last week as investors feared the bloc's third largest economy could be the next country to be embroiled in the euro zone crisis due to a public debt burden of around 120 percent of GDP.
Lizal, who joined the seven-member governing board in February said the domestic growth story was a counterweight to Italian risks.
The bank's new economic forecast due to be released in August will paint a rosier picture of economic growth for 2013 than this and the next year, supporting the view that policy tightening could come relatively soon, he said.
The bank now sees the economy growing by 1.5 percent this year and 2.8 percent in 2012.
But fears of further contagion in the sovereign debt crisis was a reason for delay in the first hike.
"Since we have no historical experience (with such a crisis) it is very hard to forecast how it will all pan out," he said. "It is very hard to work with."
In this situation, Lizal said it was a smaller mistake to raise rates too late than make a premature hike.
"In the moment of a change in the economic cycle it is not a significant problem if rates are risen a month earlier or later but it can be a problem if rates were changed shortly before some significant uncertainties materialised," he said.
NOT WORRIED BY RATES BELOW ECB
Rate hikes by the European Central Bank raised concerns among some Czech policy makers that the widening of the interest rates differential to the current 75 basis points could trigger crown volatility. Lizal said he was not worried about the wider gap in the official rates because its impact on Czech assets is now smaller than in the past as investors differentiate better among individual countries and Czech assets are seen as a safe bet.
"Amid these elevated (global) uncertainties, a number of investors prefer safer investments even if the interest rate differential (is not favourable)," he said.
In the domestic economy, Lizal said he expected a moderate drop in unemployment to continue below the current rate of 8.1 percent, buoying households' purchasing power and demand.
"In the fourth quarter the economy will likely be set on the growth path, the output gap will be closing and the inflation pressures will start emerging," Lizal said.
This may be a reason for a hike although wages may not rise much because it will be mainly low-wage jobs, eliminated during the crisis, that will be created again.