The Czech central bank is more likely to need currency interventions to weaken the koruna as the inflation rate remains below its forecast, policy maker Lubomir Lizal said.
The Ceska Narodni Banka in Prague isn’t “behind the curve” on easing monetary conditions as currency sales have a faster impact than interest-rate cuts, central bank board member Lizal said in an interview in Prague yesterday. While mixed signals from the economy are clouding the outlook, inflation is surprising by missing the central bank’s forecast, Lizal said.
“Now it seems much more likely that there will be a need to intervene, compared with what it appeared to be at the beginning of the year,” Lizal said. “Given the faster transmission of the exchange rate channel, I don’t believe we are getting behind the curve.”
The $217 billion economy contracted for six consecutive quarters through March, its longest recession since current records started in 1996. With households and businesses curbing spending, the central bank cut borrowing costs to what it calls “technical zero” last year and policy makers began in September deliberating whether weakening the koruna is needed to meet their 2 percent inflation target within 18 months.
The koruna has lost 4.3 percent against the euro since Sept. 17, the day before Governor Miroslav Singer first signaled the possibility of currency sales. It reversed earlier gains today to trade 0.2 percent weaker at 25.650 per euro as of 4:05 p.m. in Prague. The yield on the government’s 10-year koruna bond rose 3 basis points, or 0.03 percentage point, to 2.03 percent.
Lizal’s comments are part of effort to keep the koruna at weaker levels, according to Michal Brozka, an analyst at Raiffeisenbank AS in Prague.
“While we expect a cyclical economic recovery that would support the koruna, the CNB will keep intervening verbally to slow down the currency gains,” Brozka said by phone.
The central bank kept the benchmark two-week repurchase rate at 0.05 percent for a fourth meeting on May 2, almost half a point below the European Central Bank’s main rate.
Consumer prices grew 1.3 percent last month from a year earlier, the slowest in almost three years as the cost of natural gas fell and mobile-phone operators cut charges. That compared with the central bank’s estimate of 1.6 percent.
Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.6 percent in May, below the 1 percent to 3 percent target band, according to the central bank.
The economy contracted 2.2 percent in the first quarter from a year earlier. Even as the recession deepened, the GDP data showed some signs of improvement as household spending rebounded, Lizal said.
Still, in price trends, which are more important from the monetary-policy viewpoint, “I’m recognizing materializing disinflationary risks,” according to Lizal.
“If the decision at the last policy meeting had been about interest rates, I would have very seriously considered cutting rates,” he said. “The exchange-rate channel is much faster. The standard policy horizon for a change in rates is 12 to 18 months, while the exchange-rate effect could be visible in the inflation as early as in half a year.”
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