By Jana Mlcochova (Reuters 23.4.2012)
Next move in rates can be either way
* CPI outlook to be clearer at end of summer
* Wage negotiations seen crucial for CPI, rate outlook
* Euro zone debt, govt budget cuts also key for rate path
* Government austerity drive is sensible
Czech interest rates should stay unchanged at a record low at least until late summer when the inflation outlook and the situation of some debt-laden euro zone countries is clearer, a central banker has told Reuters.
Then the central bank may move borrowing costs up or down, depending on which risks prevail, board member Lubomir Lizal said in remarks cleared for publication on Monday.
The highly open central European economy fell into recession in the fourth quarter as the impact of weak demand suppressed by government austerity outweighed the solid pace of growth in exports of industrial goods, such as Skoda cars from the Volkswagen group, electronics and steel products.
But that dip is not expected to last long and inflation has been prodded higher by tax changes at a time when the bank's main two-week repo rate is already below that in the euro zone at 0.75 percent.
"In summer it will be clear how wage negotiations have ended and what will happen with the announced fiscal changes. Then it is necessary again to consider all risks and from this point of view I cannot exclude a change in rates in either direction," Lizal said.
"Uncertainties today are so large that I cannot say whether one or another direction will prevail and when."
If a new macroeconomic forecast that the bank is due to release on May 3 brought some surprise, the bank may consider a change in rates earlier than in late summer, Lizal added.
But after almost two years of unchanged borrowing costs - - the longest halt on record - most economists polled by Reuters expect the bank to hold fire for the rest of the year.
Inflation - now at 3.8 percent - is set to stay above the bank's 2-percent target for most of the year due to a January hike in the lower value added tax (VAT) rate to 14 percent from 10 percent mainly applied on food, drugs and other basic items.
While the bank is unconcerned by the temporary impact on the headline number, Lizal said it was key for the future rate path whether the temporary rise in prices due to the higher VAT rate has changed inflation expectations.
Although there were no signs that this has happened, Lizal said he could see a "latent" pressure for higher prices counterbalanced by households' efforts to cut spending.
"I can see that the rise in prices (due to the tax hike) has a psychological effect on expectations that it will get worse," he said.
Wage negotiations later in the year should show whether inflation expectations have changed and the bank should act, he added.
The rate outlook was also closely linked with the euro zone, the country's main trading partner. A worsening in the bloc's debt crisis could mean pressure for looser policy, Lizal said.
The future of the Czech government, on the verge of collapse due to infighting, and uncertainty over whether all the budget austerity it has announced will actually be implemented, also blurred the rate outlook, Lizal said.
"I do not think we should move rates up and down in the short-term simply because uncertainties that can be seen are relatively strong," he said.
The Czech government has impressed debt markets with action to reel in public finances in the past year with a combination of cuts and tax hikes hoped to cut the public finance deficit to 0.9 percent of gross domestic product (GDP) by 2015 from 3.1 percent last year.
But some economists have said that the Czechs, whose debt level is already only about half of the EU average, were being overzealous and that austerity would put an unnecessary strain on the already shrinking economy.
Lizal said the government's austerity drive was sensible despite the small economic contraction in the last two quarters of 2011 as using debt to propel growth would not lead to sustained growth in the long term.
"If we, as a small and open economy, increase our debt, we will buy some growth but it will not be a sustainable growth. It will only be a one-off boost, and the long-term sustainable expansion will only be as good as (our) productivity."