By Andrea Dudikova (Bloomberg, 11.6.2009)
The Czech central bank has room to cut interest rates from a record low, though risks such as a weaker-than-projected koruna present policy makers with a dilemma, bank board member Vladimir Tomsik said.
Economists are also divided. Seven of 12 economists in a Bloomberg survey expect the Ceska Narodni Banka to leave its two-week repurchase rate unchanged at a record low of 1.5 percent at a June 25 policy meeting. The other five expect a cut to 1.25 percent.
The conundrum for the seven policy makers, who have slashed
2.25 percentage points from the benchmark rate since June 2008, comes after the economy fell into a deeper recession than they had expected, Tomsik said in a Prague interview yesterday, adding he is uncertain on how he will vote at the meeting.
“I personally would see some room for a rate cut, but on the other hand inflation is in line with our expectations,” he said. “There’s certainly a dilemma as to what to do with rates.
Negative growth suggests an argument for a downward move, but I see a risk of a fall in the savings ratio, which rather speaks in favor of leaving rates on hold.”
Central European economies are suffering as the crisis hurts exports to Western Europe and draws investors away from riskier emerging-market assets. Many central banks have been lowering rates recently to help jumpstart growth, though they remain wary of the effects rate moves have on their currencies.
Weaker Koruna
“The koruna is weaker than we have expected, that is the truth, and that is one of the risks why at the moment I’m truly hesitant as to whether to lower rates or not,” Tomsik said. The bank projected a “centerline rate” of 26.6 for the koruna against the euro for the second quarter. It traded at 26.740 to the euro at 1:19 p.m. in Prague today.
Tomsik’s view that there’s room for cutting rates comes after Vice Governor Miroslav Singer said on May 28 that “further rate reductions can be imagined if the European Central Bank cuts rates further, if disinflation strengthens or if the crisis escalates.”
Still, Singer said in a presentation that the next move in rates “is hard to predict.”
‘Strong Reason’
Governor Zdenek Tuma said in a May 15 interview that the bank has room for “maneuvering” with monetary policy, adding he can’t foresee the next move. Central banker Eva Zamrazilova told reporters on May 15 that she sees no “strong reason” to reduce rates further.
Gross domestic product shrank a record 3.4 percent annually in the first quarter as recessions across Europe undermined demand for exports, forcing companies to reduce investments and inventories. The central bank has forecast a full-year contraction of 2.4 percent this year.
Tomsik said he was “very surprised” with developments in final consumption, both of households and the government in the first quarter. Consumer spending increased a real 3 percent even as unemployment has risen “steeply in several last months” and wage growth is “very slow,” he said.
“But still, household consumption is growing rapidly and this raises the question as to how this consumption is financed,” he said, adding that while these figures “aren’t known yet,” it’s “inevitable that the ratio of savings is falling. This is something that would concern me, if the figures prove this.”
Zero Rates
Even if policy makers do decide to cut rates further, Tomsik said the Czech central bank is not heading toward zero, like the U.S., Japan and the U.K.
“I dare to say that this economy doesn’t need that,” he said. “I still believe that the worst has either taken place in the first quarter or may be in the second quarter, but definitely I don’t think that we are heading toward a policy of zero interest rates.”
A “moderate” economic revival may be expected next year as economies abroad signal a turnaround may be nearing, he said.
The global financial crises, which has crimpled Czech economy, has also “completely killed the debate on setting a euro adoption date,” he said as the country will at least until
2012 exceed the deficit criteria ceiling.
“It’s clear that at the moment, the debate about the date is truly dead and it is wasting of time,” he said. The crisis also “teaches a lesson how necessary it is to speed up public finance reforms, namely in mandatory spending.”