Czech Central Bank May Raise Rates Earlier, Board Member Says
Bank Board member Pavel Rezabek speaks in an interview with Bloomberg
by Peter Laca (Bloomberg, 15.3.2011)
The Czech central bank may raise interest rates earlier than it suggested in its latest forecast to reinforce longer-term economic stability, board member Pavel Rezabek said.
The Ceska Narodni Banka isn’t under pressure to increase rates immediately as the economy lacks demand-led inflation pressures Rezabek, 50, said in an interview in Prague yesterday. He didn’t give a timeframe for when he thinks rates will rise. The Hungarian and Polish central banks have raised rates by 75 basis points and a quarter-point respectively as policy makers around the world are struggling to contain inflation, driven by surging global food and fuel prices. The European Central Bank may raise interest rates next month, President Jean-Claude Trichet said on March 3.
“I would expect a slight monetary-policy tightening earlier than indicated in our latest forecast,” Rezabek said. “I’m prepared for a hike, because I don’t find such low rates favorable for overall longer-term economic stability.” Policy makers left the main Czech rate unchanged on Feb. 3 after three of the seven board members voted for a quarter-point increase. One of the supporters of higher borrowing costs, Robert Holman, has since left the central bank’s board at the end of his term and was replaced by Lubomir Lizal on Feb. 13.
Voting Results
Rezabek voted for no change in all four meetings when at least one board member voted for an increase in borrowing costs. The bank has kept the two-week repurchase rate unchanged since May after cutting it in steps by a total of 3 percentage points since August 2008.
Czech inflation unexpectedly slowed to 1.7 percent in January, from 2.3 percent in December, and the February reading of 1.8 percent remained below the central bank’s 2 percent target.
The bank estimates inflation will match its 2 percent target in the first quarter of 2012 and accelerate to 2.1 percent in the following three months. It signaled in its February forecast interest rates may increase near year-end. Czech inflation is currently “anchored at low levels,” as salary negotiations indicate moderate wage growth for this year and “there are also expectations of persisting higher unemployment,” Rezabek said. “From this point of view, I don’t see demand-driven inflationary pressures in the Czech economy.”
Economic Growth
The economy returned to growth last year as demand for its products, including cars assembled by Volkswagen AG’s unit Skoda Auto AS, improved in western Europe, mainly Germany. Gross domestic product growth slowed to an annual 2.6 percent in the final quarter of 2010, from a revised 2.7 percent in the previous three months.
“The economy should be given time to take a breath as it recovers,” Rezabek said. “For me, demand pressures are the main risks in terms of inflation, and since there are no such risks visible in the near term, the question is when to tighten the monetary conditions.”
Investors boosted their bets that Czech rates will start rising earlier than suggested in the forecast after Trichet’s comments that the ECB may lift rates as early as next month. Czech forward-rate agreements locking in the three-month interest rates in three months’ time has since dropped to 1.42 percent, from 1.52 percent on March 4, while still maintaining a premium over the Prague Interbank Offered rate, or PRIBOR, which stood at 1.19 percent today.
“The market appears to be thinking we will automatically follow the ECB,” Rezabek said. “The relation between the ECB and Czech monetary policy is not that automatic. The Czech economy is in a different situation than the euro zone.”
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Czech Central Banker Says Rates May Increase Before End of 2011
Czech central bank board member Pavel Rezabek said the monetary authority may “slightly” raise the benchmark two-week repurchase rate earlier than near the end of the year as suggested in the bank’s latest forecast.
Rezabek spoke in an interview in Prague on the economy and interest-rate outlook:
On demand pressures:
“There is no indication at present that inflation in the Czech Republic wouldn’t be anchored at low levels.
“Wage growth was relatively weak last year, compared with previous periods. Wage negotiations for this year also indicate moderate growth and there are also expectations of persisting higher unemployment. From this point of view, I don’t see demand-driven inflationary pressures in the Czech economy.
“The Czech Republic is registering increased demand from abroad but that doesn’t have to mean a significant increase in inflation. I’m not worried that increased demand pressures, generating demand-driven inflation, will emerge in a relatively near-term period.
“Retail sales are also a good indicator of demand pressures in the economy. The data from the end of last year, which included the Christmas shopping period, didn’t indicate any threat of demand pressures.”
On commodity-price pressures:
“After a sharp increase in commodity prices, the trend has turned around and we now see a decline. Especially food prices are showing a visible decrease.
“If the decline in commodity prices continues, the spillover into other prices will be relatively small.”
On the interest-rate outlook:
“The economy should be given time to take a breath as it recovers. For me, demand pressures are the main risks in terms of inflation, and since there are no such risks visible in the near term, the question is when to tighten the monetary conditions.
“I am prepared for a hike because I don’t find such low rates favorable for overall longer-term economic stability. The question is the timing of the hike.
“I would like to see the debt situation in Europe, and partly in the world, to calm down a little more.
“But I would expect a slight monetary-policy tightening earlier than indicated in our latest forecast, which sees it at around the end of this year.
“At the same time, seeking to meet the inflation target -- as far as I am concerned -- is a high priority when considering an interest rate change.”
On the impact of European Central Bank rate changes:
“The market appears to be thinking we will automatically follow the ECB. But there has been a negative, as well as positive, differential between the ECB rate and the Czech policy rate in the past. The relation between the ECB and Czech monetary policy is not that automatic. The Czech economy is in a different situation than the euro zone.
“The Czech koruna’s exchange rate is now moving at around levels expected by the Czech National Bank.
“The question is whether the German engine can continue to carry the entire European economy because a number of states still have economic and financial problems.
“The European Union has just agreed to increase the rescue fund. The European Central Bank, while signaling an increase in interest rates, is not planning to end liquidity programs. This itself is not a reason to be overly optimistic and it shows the problems in Europe are not solved yet.”