By Peter Laca (Bloomberg 18. 5. 2016)
The Czech economy doesn’t need further unconventional monetary measures at present, but the central bank may still use negative interest rates if it needs to prevent sharp currency jumps when it scraps its limit on koruna gains, board member Lubomir Lizal said.
Czech lenders are generating enough profit, and a short period of sub-zero rates wouldn’t endanger the stability of the financial industry if the central bank needs them when it drops the cap, expected at around mid-2017, Lizal said in an interview on Monday. While negative rates “could be a problem” if they stayed in place for longer, “I don’t think we’ll be in that situation,” said Lizal, 46.
The monetary authority is grappling with competing economic forces as domestic demand pushes some consumer prices higher while declining commodity costs keep overall inflation well below the 2 percent target. Policy makers have discussed negative rates as a possible tool to deter speculative capital inflows, but they have refrained from following some of their global counterparts in embracing them and say the cap on koruna gains is stimulus enough.
“Negative rates could be a useful instrument at the time of the exit if the situation on the market requires it,” Lizal said in his office in Prague. “I don’t think they’re needed at the moment. The current policy setting is still working sufficiently well, so there’s no need to make any changes now.”
The Czech koruna has been locked in a narrow range for more than six months, trading little changed at 27.021 against the euro at 10:01 a.m. in Prague. The central bank has held the benchmark interest rate at what it calls a “technical zero” of 0.05 percent since 2012. It has repeatedly intervened on the market to prevent the koruna from gaining beyond the limit, defined as “close to” 27 per euro, since it was introduced 2 1/2 years ago.
The regulator expects to scrap the Swiss-style cap at around the middle of next year when it forecasts inflation will reach target in a sustainable fashion. While the central bank doesn’t expect sharp koruna gains after returning to conventional policy, the koruna could come under appreciation pressure if Czech interest rates are well above those in the euro-area at the time of the exit, according to Lizal.
“I personally don’t see negative rates only as a tool to discourage speculative capital inflows,” he said. “That is one of their functions, but I wouldn’t limit their use only to that.”
Inflation Expectations
The central bank has repeatedly pushed back the expected timing of returning to standard policy and it’s now waiting to see if the decline in commodity prices suppresses inflation expectations and wage growth.
Headline inflation accelerated to 0.6 percent in April and exceeded the central bank’s forecast, but Lizal said he wouldn’t draw strong conclusions from a single number as price growth is influenced by factors that are outside the reach of monetary policy.
Core inflation, which is adjusted for volatile items such as food and fuel prices, has been hovering above 1 percent, which shows that demand “is not that bad,” he said.
“The domestic economy is doing well now; we have the lowest unemployment rate in the European Union, and there’s no reason to override disinflation pressures coming from abroad with some policy reaction at any costs,” Lizal said. “The foreign-exchange commitment was well set, considering the uncertainties at the time when it was introduced, and I still consider it well set for the current situation.”