By Jana Mlcochova (Reuters, 24. 1. 2012)
Czech central banker Eva Zamrazilova will probably not vote for higher interest rates without the support of other colleagues in February, but she will do so in March if data shows inflation has exceeded market expectations, she told Reuters.
The bank's seven-strong governing board voted unanimously in December to keep the key two-week repo rate unchanged at a record low 0.75 percent for a 19th month running, as policymakers wait to see whether a recent spike in prices is only temporary, due to a one-off tax hike, and will subside.
Zamrazilova said she was not convinced that retailers factoring in a January value added tax increase in advance are responsible for the higher inflation in the fourth quarter last year, as most analysts and central bank staff believe.
In remarks cleared for publication on Tuesday, she said prices of farm commodities and a weaker crown might have played a more important role than earlier thought.
"I see reasons to tighten monetary policy. Inflation is above the 2-percent target ... and it will stay above this target," Zamrazilova told Reuters in remarks cleared for publication on Tuesday.
Inflation decelerated to 2.4 percent in December, from 2.5 percent in November, but was still far above the central bank's expectations of 1.7 percent.
The bank said faster price growth, driven by food prices, was mainly due to the early effect of the expected January VAT rise.
The next central bank board meeting is on Feb. 2, two weeks before January CPI data is published on Feb. 16.
Central bank Governor Miroslav Singer said last week the crown's current exchange rates gave it room to keep borrowing costs at record low levels for a while. Fellow board member Pavel Rezabek was quoted as saying on Friday no rate rise was likely in the near term and a cut was not needed either.
Zamrazilova said the fact that prices had begun to rise in October, when inflation jumped to 2.3 percent, from 1.8 percent in September, too far ahead of the January VAT hike, undermined the idea that the tax change drove the increase.
"If the January number comes out above market consensus and the central bank expections, then I will not hesitate any more at the next meeting (in March because) the story of an inflation temporarily driven by a VAT increase would not work."
Zamrazilova said she might raise her hand for a hike in February but she would not do so alone. She was the lone voice four times over the past year-and-a-half during which she voted eight times for higher rates.
Zamrazilova has said in the past it is impossible to forecast the outcome of a potential Greek default which analysts say could hit emerging European assets.
She said her main worry was on global inflationary risks, a focus some of her policymaking peers see as secondary to contagion dangers posed by the euro zone crisis.
She said the present level of the key two-week repo rate was too low and could result in disequilibrium setting in over the long term in the economy She said a neutral level of the repo rate was roughly 1.0-1.5 percent.
"It might as well be that one of the reasons the crown is below forecast is that rates have been too low for too long," she said.
The crown lost 4.76 percent since September, the second- worst performance in the region after the Hungarian forint's 9.6 percent fall in the same period, as investors ditched riskier central European assets due to the festering euro zone crisis.
The unit's average rate in the first quarter so far stood at 25.616 on Tuesday, far weaker than the bank's forecast for the rate of 23.7.
EXPORTS AND LOANS
Net exports should help 2012 gross domestic product eke out small growth, as Germany, the largest single market for Czech industrial firms, is also likely to maintain expansion this year, Zamrazilova said.
While household consumption is set to stagnate, a swift rise in corporate lending towards the end of last year may indicate companies' appetite to invest.
"It is possible that investment demand will accelerate," Zamrazilova said.
But she added more detailed data were yet to show whether companies took the loans due to expensive commodities and energy, or whether to invest.
Overall corporate loans rose by 6.6 percent year-on-year in November after rising at an annual rate of around 5-6 percent each month from April, central bank data showed.
INTEREST RATES
"I see reasons to tighten monetary policy. Inflation is above the central bank's 2 percent target and it will stay above this target.
"Demand pressures are limited but the exchange rate channel of monetary policy will, for now, cause import prices to rise, so I do see a reason for tightening.
"But I cannot tell you how I will decide (at the meeting on Feb. 2). I need to see the situation report, including new forecasts for economic development.
"Also, we do not know (the development) of consumer prices in January, where it will show to what degree the rise in value added tax (VAT) was reflected (in inflation data) in advance, and also what effect fundamental pressures from abroad had.
"I am not sure it is chiefly the higher VAT because food prices began to rise already in October.
"If I were alone in the vote at the next bank board meeting, if I did not persuade other board members, then I see no point to vote for a hike (at that meeting).
"I may wait for the publication of inflation data for January.
"If the January figure comes out above market concensus and central bank expectations, then I will not hesitate any more at the next meeting, (because then) the story of inflation temporarily driven by a VAT increase would not work."
INFLATION
"I see inflation as a risk in the long term. Prices of commodities, fuels, some metals, and some agricultural commodities are rising thanks to demand from Asian countries and other emerging markets, Russia, Brazil, and others.
"It is necessary to mention that the world is not in crisis, a number of important world economies have been expanding solidly.
"The weakened crown exchange rate is contributing in such a way that (it elevates) import prices. I definitely see a risk of inflation filtering through import prices."
ON EURO ZONE
"I am afraid the euro zone will languish in the risk of recession for a relatively long time.
"All the proclamations... that Europe will grow its way out of debt thanks to kickstarting competitiveness do not seem very realistic to me.
"I think it is fairly clear that Europe is not able to kickstart growth from the top, by measures (implemented) by (EU) clerks.
"Growth must come from the bottom, from the corporate sphere, and here I see a problem.
"All Keynesian firepower has been used. And only huge debts and risk of inflation remain after the firing."
ON THE ECONOMY
"The moderately positive development (seen) in Germany could lead to growth... staying at least above zero.
"The weak exchange rate also plays a role in the Czech Republic and helps exporters. Exports may not slow as dramatically as some crisis scenarios are showing.
"Therefore I expect very moderate growth driven by exports. Net exports could help and overall gross domestic product (GDP) growth could be positive again this year.
"A rise in consumer prices will bite into nominal consumer demand, so real consumption of households will not grow this year."
ON LOANS
"We observed relatively significant growth in loans in the corporate sector in the second half of 2011. The question is why companies are taking these loans.
"Loans to companies with foreign ownership are rising in particular; it is more than 13 percent annual growth. Loans for domestic companies are growing around 4, 5 percent year-on-year, which is not small.
"It is not clear yet whether companies are taking the loans for operations, due to expensive commodities and energy, or whether part of the loans indicate a future revival in investment.
"It is possible that investment demand will accelerate.
"There is an imbalance between growth in loans and (growth of) domestic product."
ON BANKS
"The exposure of Czech banks toward parent institutions remains roughly unchanged at the level of 14 percent of equity, which is deep below the limit set at 25 percent."