By Jan Lopatka (Reuters, 25.7.2012)
The Czech central bank's new economic forecast due out next week will likely see another downgrade in economic growth, but the weaker crown currency has clouded the outlook for further policy easing, a central bank board member said.
The central bank's downbeat "alternative" economic forecast from May, a scenario that included tax hikes that have since been approved by the lower house of parliament, has become the main view, said Lubomir Lizal, whose vote was key in the bank's June decision to cut its main rate to a record low 0.5 percent.
Yet even this forecast, seeing zero growth this year and a 1.1 expansion in 2013, may see a further cut, he said in an interview on Tuesday and agreed for release on Wednesday.
"A larger difference is the development not only in the Czech Republic but in Europe, which is not going in any positive direction," Lizal said.
"There may be some correction, and I would not be surprised if it was a correction towards a slightly worse development."
Lizal said the main drag on the recession-hit economy was the "hyperconservative" attitude of Czech households and companies.
However, given that the exchange rate has been weaker than central bank forecasts and below its long-term appreciation trend, there was a question over further rate easing, he said.
Since March, the crown has returned 4 percent gains won in an early 2012 emerging market rally as the effect of cheap European Central Bank liquidity measures faded and the euro zone crisis escalated, denting the global economic outlook.
Lizal said crown weakening, especially against the dollar, was worth watching for its impact on commodity import prices, which makes it rather a pro-inflationary signal, he said.
"If GDP is revised down, there will probably be a shift in interest rates (projected market rates trajectory) as well, but then there will be a question of considering inflation as the primary target, given the exchange rate development," he said.
"I don not exclude that the forecast will assume one - stability, or the other - a further decline," he said.
Most analysts expect the bank to keep rates on hold when it meets on Aug. 2. The majority of those polled by Reuters this week believed June's decision was the last easing in this cycle.
The Hungarian central bank left rates flat at an EU-high 7 percent on Tuesday, but analysts expect it to cut later this year to spur an economy sliding into recession. And in Poland, some rate setters are also calling for rates in the region's strongest economy to fall.
AUSTERITY NOT OVERDONE
The export-reliant Czech economy has been hampered by government fiscal cuts and low household spending. Gross domestic product fell 0.8 percent in the first quarter from the previous three months, a second quarter of decline, and household spending dropped 2.3 percent.
The government raised value-added tax this year and plans more tax hikes next year, alongside further spending cuts and a slowdown in the indexation of pensions. Reform of the pension system will require further savings as of next year.
Many analysts have called on the government to ease up on the belt-tightening, given that it enjoys low debt at just over 40 percent of gross domestic product, and record-low debt yields.
Lizal said the Czech economy saw a contrast between still high-performing exports and domestic demand stricken by bad news from the euro zone.
"In domestic demand, domestic investments, everybody is behaving cautiously, I would even say hyperconservatively."
Yet he would not be drawn into saying the government should ease up from plans to cut the fiscal gap to 3 percent this year and below that next year and in the years ahead.
"We can proceed at some lighter pace, yet due to the general nervousness I do not think it is possible to deviate from some reasonably calibrated strategy," he said.
The impact of austerity on the economy was balanced by the benefit of having market confidence and low yields, he said.