Czechs Have Luxury to Cut Rates More, Policy Maker Says

The Czech central bank has more room to cut interest rates before it applies less conventional policy tools to ease monetary conditions, Vice Governor Vladimir Tomsik said.

Tomsik commented on economic trends and the monetary-policy outlook in an interview in Prague yesterday.


“The new forecast includes a significant slowdown in economic growth in the effective euro zone, representing the Czech Republic’s main trading partners, and that is one of the most important factors for me.

‘‘The forecast reflects expectations of a great decline in market-interest rates in the euro zone, which would bring them to an even lower level than after the collapse of Lehman Brothers.

‘‘This means our new forecast clearly assumes a significant decline in foreign demand, and it also assumes a notable weakening of domestic demand.

‘‘The only inflation pressures are now coming from the tax changes, the impact of past depreciation of the exchange rate and commodity prices. I don’t see demand-driven inflation.

‘‘The flash GDP estimate is the first more important piece of information that certainly isn’t speaking against the latest forecast.

‘‘We have been registering very weak household consumption in several recent quarters, and its growth rate seems to be the weakest in the modern history of the independent Czech Republic. This is also documented in savings levels, which are quite high and are now at pre-crisis levels, meaning people are deferring consumption.’’


‘‘It’s possible to take a wait-and-see approach, as the majority of the board members did. I didn’t choose that approach, because if you take the wait-and-see approach, and the forecast materializes, then it means that a stronger policy action will be needed.

‘‘I will be asking how great is the risk that the absence of an action now, to lower interest rates, could result in inflation moving below the forecast.

‘‘The forecast already assumes lower interest rates in the next several quarters. It’s still possible to make up for this delay, but the wait-and-see approach means running the risk of applying sharper steps.

‘‘The good news for me is that the market interest rates, and outlook expressed in FRA rates, are showing a declining tendency. So the trend is in line with the forecast; the question is how to reach the absolute levels.’’


‘‘One of the tools of monetary policy is transparent communication. I personally think that sometimes it’s not necessary to conduct monetary policy through adjusting interest rates by decimal points, but it may be enough to signal our intention and the market will follow.

‘‘In this respect, we presented our direction now, the forecast signals where market interest rates should move. If I see that this isn’t materializing, and if there is a risk of zero or even negative interest rates, I am not ruling out using any instruments, and their combination, to achieve the desired result.

‘‘For me, a zero interest rate is a technical barrier, which we don’t necessarily have to reach. It may be enough if market interest rates fulfill the assumptions of the forecast. And if it doesn’t happen, I am personally ready to take all necessary steps to achieve our inflation target and help stabilize inflation expectations.

‘‘The Czech financial market is healthy and fully functioning, and, compared with some markets abroad, we don’t need to correct any distortions here.

‘‘There is no crisis of confidence in the Czech financial market, there is no problem with liquidity, there is no need to correct any systemic problems of banks or deleveraging.

‘‘So any other tools, some may call them unconventional, would reflect the state of the financial market here. In this case, it would make sense to use these additional instruments that wouldn’t be about quantitative effects but about decreasing the long end of the yield curve to achieve stable long-term inflation expectations. If I were to act, I would be aiming to prevent a shift into deflation expectations.

‘‘I don’t want to mention any specific instruments now, because we still have the luxury of not fully exhausting the room for adjusting interest rates. I’m sure that at the moment when there is a risk to inflation expectations, and the scope for adjusting interest rates was used up already, we will be ready to apply other tools.

‘‘It will be up to the bank board to choose the instruments that will be the most effective in achieving the desired result, but also instruments that will represent the least possible risk for achieving the inflation target, risk for the credibility of the CNB as well as the risk for the whole economy.

‘‘For me, it wouldn’t be about monetary-policy transmission or quantitative effects. It would be about influencing the long-end of the yield curve, because until now we have been focusing mostly on the short end.

‘‘If there is a risk of inflation being below the target, or even a risk of deflation expectations, I can personally imagine making a commitment to do everything that is needed to return inflation expectations toward the inflation target.’’

-- Editors: Jeffrey Donovan, Leon Mangasarian

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