By Halia Pavliva and Peter Laca (Bloomberg, 18.4.2011)
The Czech economy’s signals are increasing “uncertainty” and clouding the outlook for interest rates, central bank Governor Miroslav Singer said.
Demand pressures are weaker than the central bank forecast and offsetting upward inflation risks caused by higher commodity costs coming mainly from abroad, Singer, a University of Pittsburgh-trained economist who was a deputy governor before taking the bank’s top job in July last year, said in an interview in Washington, on April 16.
“One thing is happening for sure: the uncertainty is increasing,” he said. “Whether the path of appropriate policy is moving in a stricter direction, of higher rates, or tighter monetary policy for us, is much less clear to me.” Singer reiterated that he decides how he will vote on rates shortly before the policy meeting.
The central bank has kept the benchmark two-week rate at record-low 0.75 percent since May 2010 as inflation holds below its target and the economic recovery slowed. This contrasts with the European Central Bank, which raised its main rate to 1.25 percent in April to stem price growth. Three Czech board members want to lift borrowing costs earlier than near the end of the year as suggested by the central bank’s forecast from February.
Differing Views
There are differing views among Czech policy makers on inflation risks, with some board members advocating higher interest rates. Singer was one of five policy makers who voted to keep rates stable at the last monetary session on March 24, while one, Eva Zamrazilova, wanted a quarter-point increase.
Another policy maker, Kamil Janacek, who didn’t attend the last rate-setting meeting, said on April 6 he wanted to lift rates at the next session on May 5, when the bank board will also discuss an update of its inflation outlook. Vice-Governor Mojmir Hampl, who voted for no change, said on April 7 his view on economic developments hasn’t changed since the March meeting.
“Still, I feel our future forecast may stress a little bit more inflationary risk than the previous one, mainly because of commodity prices,” Singer said.
External developments, including the sovereign debt crisis in the euro area and higher commodity costs, are making it more difficult to predict future developments in the Czech economy, said Singer, forecasting the country to maintain gross domestic product growth this year after rebounding in 2010 from the worst recession since the fall of communism two decades ago.
Mixed Signals
“We are getting signals that are going against each other,” Singer said. “We are getting a bit lower wage growth, we are getting very little of domestic demand pressures. On the other hand, we are getting stronger inflationary impulses from external world, so, how these things will add up is very uncertain.”
Czech inflation slowed to 1.7 percent in March from 1.8 percent in February, below the central bank’s 2 percent target for a third month. The unemployment rate dropped to 9.2 percent in March from a 6-year high of 9.9 percent in February 2010 as improvement on the job market traditionally lags a revival in economic growth because businesses focus on increasing productivity rather than hiring new employees.
“It’s very difficult for consumers to start inflationary pressures without wage increases, without an unemployment decrease,” Singer said. “So, at this moment, I would say the more significant phenomenon is the increase of uncertainty than possibly whether there is some less significant, or maybe marginal, increase of inflationary pressures.”
ECB Influence
The ECB’s decision to lift interest rates in April “had been expected” by Czech policy makers and it didn’t have “much” of an influence on their March decision, Singer said.
A more significant shift in the ECB’s inflation outlook, he said, may have an effect on the Czech central bank, which uses euro-area interest rates as one of variables in its forecasts.
If the ECB “changes its opinion about the future path of inflation, it essentially changes its opinion about its own rates, and that would influence us,” Singer said. “But I do not see that it has happened so far.”
The Czech central bank, which doesn’t publish a policy bias, estimates price growth will match its 2 percent target in the first quarter of 2012 and accelerate to 2.1 percent in the following three months. The bank’s latest forecast from February assumes market interest rates will rise from the end of 2011.
The Czech koruna has gained 3.2 percent to the euro this year, the third-best performance among 25 emerging-market currencies tracked by Bloomberg. Forward-rate agreements locking in three-month interest rates in three months, were at 1.45 percent on April 15, compared with the three-month Prague Interbank Offered Rate, of PRIBOR, at 1.21 percent.
Czech Banker Says Preventing Crises by Regulation Is ‘Nonsense’
Attempts to prevent economic crises through regulatory and supervisory measures are bound to fail as market economies are “generating crises by definition,” Czech central bank Governor Miroslav Singer said.
Czech policy makers have been critical of initiatives that may weaken national supervisory powers. The country hasn’t had to bail out any of its banks in the global financial crisis and the Prague-based Ceska Narodni Banka has “considerable worries” about proposed changes in banking supervision, Singer said in an interview in Washington on April 16.
Governments and regulators are trying to avoid a repeat of the turmoil in financial markets that followed the 2008 collapse of Lehman Brothers Holdings Inc. and led to taxpayer-funded bailouts of lenders across the world. The European Union is struggling to contain the sovereign debt crisis which forced Greece, Ireland and Portugal to seek outside financial help.
“The market economy is generating crises by definition,” Singer, 42, said. “I cannot tell you what the next crisis is going to be, I can hope it will be less severe than this one. But the idea that we can prevent, by smart supervision and regulation, the next crisis, is nonsense.”
Global regulators are overhauling bank capital and liquidity requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis. The new requirements, known as Basel III, are scheduled for full implementation by 2019.
Weathering Crisis
Czech banks weathered the financial crisis as their exposure to toxic assets accounted for less than 1 percent of all assets, banks had a liquidity surplus and deposits exceeded loans, according to central bank data. The largest Czech banks are owned by foreign institutions, including KBC Groep NV, Societe Generale SA and Erste Group Bank AG.
The latest stress tests conducted by the central bank and published on Nov. 29 showed the banking industry would remain stable even if the east European nation’s economy unexpectedly returned to a recession, although some banks may need a capital injection.
“We have considerable worries about the changes in supervisory framework and the regulatory framework as well,” Singer said. He referred to initiatives that may give more powers over asset transfers to supervisors in the home country of banks with operations in other countries “with the host having very little say.”
That “simply is not alright because our taxpayers will finally cover the failures, and we feel that who pays, should also have a say in decision-making,” said Singer.
Czech banks are well-capitalized and would meet new capital requirements under the “Basel III” framework with “almost no changes in the structure of banking capital,” Singer said.