By Jana Mlčochová (Reuters 24.10.2012)
A Czech central bank board member took a rare swipe at the government on Wednesday, saying the administration, on the brink of collapse, should stop undermining the bank's efforts to drag the economy out of recession.
Pavel Rezabek said tax hikes and spending cuts pursued by Prime Minister Petr Necas's government - unpopular measures that have split his party and could bring down his cabinet, possibly next week - had squeezed households and partly nullified the impact of record low interest rates.
With the Czech economy expected to have suffered its fourth quarter of recession through September, the bank cut its key two-week repo rate to 0.25 percent last month to prop up demand, and Governor Miroslav Singer said it may move to weaken the crown and/or ease interest rates even more.
At the same time, the government has raised taxes and curbed pension increases with the goal of cutting the public finance deficit to below the European Union's prescribed limit of 3 percent of gross domestic product next year.
Rezabek, who voted against both of the bank's last two rate cuts, said: "The efforts of the central bank are being partially negated by the measures of the pro-cyclical fiscal policy.
"Taxes are being hiked which cuts demand. Household consumption correlates with falling real disposable household income... We cannot expect that monetary policy would be able to compensate for all of that."
Czech central bankers have traditionally steered clear of commenting on government policies. In cases when central bankers have made comments, they supported the fiscal consolidation efforts.
Necas and his finance minister, Miroslav Kalousek, have won strong backing from investors, who have pushed Czech government debt yields to an all time low, with the 10-year paper hitting just 2.242 percent this month.
But following a 1 percent economic contraction in the second quarter and another fall expected from July to September, economists say the belt-tightening is smothering growth.
It has hit government popularity, and now a group of rebel lawmakers from Necas's ruling Civic Democrats are challenging a plan to hike value-added tax again in 2013. That process could torpedo the cabinet in a confidence vote expected next week.
HAMPERED
Rezabek did not comment on the political crisis threatening the cabinet, but said policymakers were sending conflicting signals: One that people should save for retirement and another that they should spend more now.
"These are quite differing standpoints which cannot be successful in kickstarting consumer demand," he said.
"What would currently be most convenient... is a recommendation that both authorities approach their processes and decisions in a counter-cyclical way and in common view of the economic cycle."
The bank's easing efforts were also being hampered by stricter credit conditions at commercial banks that increased margins and tightened collateral rules for corporate loans in October, according to a central bank survey, Rezabek said.
He said the Czech Republic's convergence with its richer Western neighbours, one of the main drivers of the appreciation of the crown in past years, has stalled as fast growth over the previous decade turned into recession this year.
"It would be appropriate if also fiscal policy helped resume real convergence," Rezabek said.
He said he could not rule out that the bank would cut rates further or deploy foreign exchange interventions, but a greater coordination of fiscal and monetary policies should come first.
"Monetary policy should consider, very cautiously, its next costly steps, such as interventions, although I cannot exclude them," he said.
"If there was more focus (by investors) on the economic situation, not only the fiscal position, the crown could be on the opposite, depreciation side."