Czech Policy Maker Holman Sees Mid-2011 Interest Rate Increase

Czech policy maker Robert Holman expects the central bank to start increasing interest rates earlier than suggested in its outlook as the economy will probably grow faster than forecast.

Holman commented on rates and the economy in an interview in Prague on Dec. 9

On the economy:

“We are seeing relatively strong growth in industry, mainly thanks to export-oriented sectors. The automotive industry is driving the economy up, while, on the other hand, double-digit declines in the construction sector are a constraining factor.

“Inventories have increased, which was expected as the restocking of inventories is a natural development after overcoming an economic recession. Growth in household consumption is also not surprising.

“Our forecast is more pessimistic than the Finance Ministry’s expectation because we are more conservative in estimating investments and consumption.

“My personal view, which is slightly differing from our official forecast, is that economic growth will be stronger next year. I wouldn’t be so conservative in estimating investments.

“I think we will see a revival in fixed investments. This is related to strong growth in Asia, while the German economy is also experiencing relatively strong growth. German economy has shown adjustments in terms of exports to Asia, and because our exports and our industry are quite tied to developments in Germany, I think this could also be an impulse for our growth.

“Furthermore, our automotive industry is also quite flexible in exploring new markets and it is successfully exporting to Asia.”

On monetary policy:

“Current monetary-policy settings are appropriate. There aren’t such inflation risks that would require an increase in interest rates at the next monetary meeting, or at the beginning of next year, and I don’t think it will happen.

“Our latest forecast says that the period of interest rate increases will probably start near the end of next year, but I think that it will start earlier, maybe at around the middle of next year. I think we will start increasing rates sooner” than what our latest forecast assumes.

“Quantitative monetary easing in the U.S. is causing an inflow of capital into emerging markets, which will push prices of assets upward in these countries. It will probably also affect commodity prices, which represents an inflation risk.

“On the other hand, with the current crisis in the euro zone, investors may increase investments into currencies that they consider safer, possibly including the koruna, and a faster koruna strengthening than what is expected in our forecast could be an anti-inflationary risk.”

On the Euro:

“In the current situation, setting a target date for adoption would be very risky and unwise.

“There is a high degree of uncertainty. Part of it is the intensifying debate on establishment of a permanent facility that should provide financial help to countries experiencing financial difficulties as seen in Greece or Ireland.

“If the Czech Republic were a member of the euro zone, we would have to contribute to such a facility with amounts that wouldn’t be small. That doesn’t make sense for us. We are not a highly indebted country, and there is no risk that we would get to the verge of a state bankruptcy.

“The euro zone is undergoing changes. Many of its members are not fulfilling the Maastricht conditions on the public- finance deficits and the state debt. This leads me to a question as to whether the euro zone is standing on sound foundations, and whether there may be even more turbulences in the future.

“The euro project has a fundamental problem. The ability to borrow cheaper in euros led to irresponsible behavior by some governments. This may not have been the case if they hadn’t adopted the euro and they would have had healthier public finances because markets would have corrected unsound policies earlier.

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net;

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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