By Jana Mlčochová (Reuters 14.3.2012)
Czech interest rates should stay unchanged for now and rise before the end of 2012 as an early recovery in the euro zone filters through to the Czech economy via higher exports, bolstering overall growth, a central banker said.
The bank's seven-strong governing board has kept the key two-week repo rate at an all-time low of 0.75 percent since May 2010 as it aims to balance out a spike in inflation caused mainly by a tax hike and partly by higher commodity prices, and a shrinking economy.
In an interview with Reuters cleared for publication on Wednesday, Kamil Janacek said Czech growth could already be recovering thanks to rising demand for the country's goods from its main trading partners in the euro zone, after the second Greek aid package and the European Central Bank's liquidity injections calmed markets.
This will eventually warrant a policy tightening in the Czech Republic, Janacek said.
"At the present time I do not see any reasons to raise and less so to cut interest rates," Janacek told Reuters.
"(But) I do not assume that rates can stay stable beyond the horizon of the year 2012. At the moment I see only one possible direction of their change, which is upward."
The Czech economy shrank by 0.1 percent in the fourth quarter, marking the second consecutive quarter of a contraction but Janacek said he would not call this recession as the drop was too shallow and he saw it rather as stagnation.
He said growth could pick up to around 2 percent in 2013.
An increase in demand for Czech exports in countries including Germany, the Netherlands, Slovakia and Poland will offset or even outweigh the effect of the government austerity measures on demand as it will lead to a drop in unemployment and a pick-up in wage growth, Janacek said.
This will ultimately lead to higher domestic demand and consumption.
"Today it is showing that the dampening or zero growth in the euro zone will not last so long and that the euro zone will recover sooner than what all the latest forecasts have shown," Janacek said.
"If this is true, then the recovery in the Czech economy will start sooner than in the second half of this year."
The government is planning to cut the budget deficit to 3.5 percent of gross domestic product this year from 3.7 percent in 2011, and has said lower-than-budgeted growth would require an extra 950 million euros ($1.25 billion) worth of savings, which could hurt domestic demand.
There are no demand-led price pressures in the Czech economy at the moment but demand could very quickly become an inflationary risk if employment rises and people become more optimistic about their future income, Janacek said.
February inflation sped to 3.7 percent, above the central bank's expectation for 3.5 percent and above the upper border of the central bank's tolerance band around its 2 percent target, driven by a January rise in the lower sales tax (VAT) rate to 14 percent from 10 percent.
Janacek said the effect of higher tax would probably last for the coming months, keeping headline inflation above 3 percent at least in the first half of 2012 and possibly even in the third quarter.
"I think the numbers that we have from February and that we will have from March will likely lead to a correction in the central bank's inflation outlook in an upward direction."
The bank's official forecast saw inflation returning below the 2 percent target by the start of 2013 but Janacek said it would not return to those level until at least the middle of 2013. At that time a pick-up in demand would start putting upward pressure on prices, he said.
The bank next meets on rates on March 29.