By Robert Müller, Jason Hovet, (Reuters 11. 9. 2019)
Czech interest rates should stay on an even keel over the next year to keep domestic inflationary pressures under control even while global central banks shift to policy easing, Czech National Bank Vice-Governor Marek Mora said in an interview.
The Czech economy has maintained solid growth thanks to falling unemployment and fast-rising wages boosting domestic consumption, which has put inflation at or above the central bank's 2% target for much of the past two years. It stuck at 2.9% year-on-year in August.
But the central European country is facing headwinds from a sharp slowdown affecting key trading partners, particularly Germany, which is teetering on the edge of recession. The European Central Bank and U.S. Federal Reserve are loosening their monetary policy to face rising risks from global trade tensions.
The Czech central bank paused its two-year cycle of rate hikes in May after one last increase in its key two-week repo rate to 2.00%. While previous outlooks had projected faster policy tightening, weakening abroad kept the bank cautious.
Mora said monetary easing by the ECB would be an anti-inflationary factor for the Czech economy but that, at this moment, it was better to have a "wait-and-see" approach to Czech rates.
"For me right now it means to more or less wait," he told Reuters in the interview on Tuesday. "We can call it rather rate stability, that is how I would see it in a one-year horizon."
The bank meets again on Sept. 25. Markets are pricing in one rate cut by the middle of 2020.
The ECB meets on Thursday and, according to a Reuters poll, is expected to cut its deposit rate and announce a restart of its asset purchase programme, less than a year after shuttering the programme and guiding for interest rates hikes ahead.
Mora said it was difficult to see to what degree the ECB may loosen but that he expected only "slight" easing.
Some analysts say the ECB's loosening could boost the Czech crown. The currency has weakened 1.7% since the start of July amid global concerns over the escalating trade war between the United States and China and whether Britain will exit the European Union with no deal in place on their future relations.
The crown's weakness runs counter to the central bank's economic outlook, which saw the currency trading at an average 25.40 per euro in the third quarter. Instead, the crown's average so far this quarter is 25.675.
Mora said the weaker-than-expected crown counted among inflationary factors.
He also said the central bank board would return to debates before the year's end on whether to restart a programme of selling the yields on its foreign currency holdings, which jumped between 2013-2017 when the bank used interventions to keep the crown weak.
He said any such programme should be neutral for the currency.
The Czech economy, highly tuned to exports, has been on a growth path since 2014, rising 2.9% in 2018. Staff forecasts see expansion slowing to 2.6% this year before rebounding to 2.9% in 2020.
"Even in case of some global slowdown or recession, there can be a slowdown here, but it does not have to be a recession and definitely I would not speak of crisis," Mora said.