By Sean Carney (Dow Jones Newswires 17. 9. 2012)
Further cuts to Czech interest rates should be approached with caution as monetary policy is already very accommodative and because prevailing inflationary risks may be exacerbated by fresh quantitative easing in the U.S., a Czech central banker said in a recent interview.
"We've done a lot. Interest rates for businesses, mortgages are very low, very acceptable," Eva Zamrazilova said in an interview late Friday.
Current monetary policy is "very, very accommodative" and the central bank has helped the economy "quite a bit" by keeping interest rates at historic lows for several years, she said.
The views of Ms. Zamrazilova, who has been one of the most hawkish members of the central bank's monetary policy board since her appointment in March 2008, contrast the increasingly dovish calls for monetary easing by many of her peers on the Czech monetary policy board.
Her inflation-fighting instincts indicate that at the central bank's Sept. 27 policy meeting, a unanimous vote to cut rates is highly unlikely.
Despite the Czech economy running below full capacity due to elevated unemployment and quarterly economic contractions since late last year, Ms. Zamrazilova says price rises for foods, fuels and commodities outpace headline inflation and that trend is likely to continue.
"I see more pro-inflationary risks... [and that concern] has been confirmed by QE3 being launched in the United States," she said.
Analysts recently polled by Dow Jones Newswires widely expect the central bank to lower its benchmark interest rate 25 basis points to 0.25% at the end of this month.
Several of Ms. Zamrazilova's peers on the Czech monetary policy board say a cut to interest rates is needed to boost the economy amid declining real wages and slack domestic demand as the country's economy has contracted on a quarterly basis since October of last year.
However, Ms. Zamrazilova said she is "not afraid of deflation."
To the contrary, she said she expects newly announced plans for unlimited bond buying by the both European Central Bank and the U.S. Federal Reserve to fuel a round of global inflationary pressures.
What's more, despite domestic household and government consumption falling for most of the last year, Ms. Zamrazilova said she is starting to see the first signs of a recovery in corporate investment, which in turn should stoke domestic demand in the coming months and quarters.
Specifically, the country's current account deficit, which had grown over the past few years as foreign owners of local companies repatriate larger and larger dividends while investing less, has started to narrow on year, at least in preliminary data from this year, she said.
The current account deficit in the second quarter of this year was 6.57 billion koruna ($354.0 million), far smaller than the CZK56.84 billion and CZK28.08 billion second-quarter deficits in 2011 and 2010, respectively.
Foreign owners of Czech companies had postponed necessary investments since the financial crisis hit in 2008, sending more money home as dividend repatriation than in pre-crisis years.
Now after four years of underinvestment those same companies are faced with the need to reinvestment in the local operations to maintain competitiveness long term, she said, adding that a renewed wave of investment may boost domestic demand while helping real wages.
Globally, the long-term ratio between local reinvestment and dividend repatriation by foreign owners is about 50%/50%, but in the Czech Republic since 2008 dividend repatriation has accounted for 70% of profits while reinvestment of profits has fallen to 30%, she said.
Speaking about the Czech koruna, which has gained 5.8% to the euro since late June, Ms. Zamrazilova said the gains are likely a correction for the currency's same rate of weakness in the first half of the year.