Feb. 26 (Bloomberg) -- The Czech central bank may need to relax monetary conditions further through koruna sales this year to meet its inflation target, said Lubomir Lizal, a member of the policy-making board.
The Ceska Narodni Banka is navigating in uncharted territory after cutting the benchmark interest rate three times last year to effectively zero. Policy makers are debating whether the longest recession on record, which is taming inflation, warrants more policy easing through a weaker koruna.
The bank’s current forecast isn’t significantly different from the previous prognosis in terms of the projected path of market interest rates, Lizal said today, adding that the koruna rate will be one of the factors for the central bank’s board when deciding on whether to ease conditions further.
The interest rate “ trajectory is still moving in the area where it may still be necessary to ease monetary conditions,” Lizal said told reporters at the central bank’s headquarters in Prague. “At present, it’s not possible to say explicitly yes or no. In essence, the forecast isn’t qualitatively different in terms of expectations of whether monetary conditions will need to be relaxed or not.”
The koruna strengthened 1.8 percent to the euro, its best weekly rally in 14 months, after the bank’s policy meeting on Feb. 6 when Governor Miroslav Singer said more monetary easing may be needed, though “the need may look less urgent.”
It lost as much as 0.4 percent today, trading at 25.537 to the euro as of 2:41 p.m. in Prague. It’s 3.9 percent weaker against the euro compared with Sept. 17, which was one day before Singer first said the bank may use currency sales to ease monetary conditions.
“The exchange rate is only an instrument,” Lizal said. The actual koruna level corresponding to policy easing “will only be debated at the monetary meeting when there is an agreement that conditions need to be relaxed.”
The central bank, which targets inflation, left the two-week repurchase rate at 0.05 percent for a second meeting on Feb. 6, almost three-quarters of a percentage point less than the euro-area benchmark.
It cut its economic forecasts for 2013 as the government’s austerity measures continue to damp demand. The bank sees the 2013 gross domestic product contracting 0.3 percent, compared with a previous estimate of 0.2 percent growth. It increased its outlook for the three-month Prague Interbank Offered Rate to 0.4 percent in 2013 from 0.2 percent.
GDP shrank 0.2 percent in the final three months of last year, marking the fourth consecutive quarterly decline, according to preliminary data.
Inflation was the slowest in 16 months in January, with the annual rate dropping to 1.9 percent from 2.4 percent in December. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 1.1 percent, unchanged from December and near the lower end of the central bank’s 1 percent to 3 percent target band.
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