May 2 (Bloomberg) -- The Czech central bank kept interest rates near zero for a fourth meeting as policy makers debate whether to weaken the koruna amid a recession.
The Ceska Narodni Banka in Prague left the two-week repurchase rate at 0.05 percent, matching all 18 forecasts in a Bloomberg survey of economists. It maintained a discount to the euro area’s borrowing costs even as the European Central Bank cut its benchmark by a quarter-point to 0.50 percent today.
Czech policy makers are in uncharted territory as they debate whether the first koruna sales in a decade are needed to meet their inflation goal. A weaker koruna has curbed the need to act, Vice Governor Vladimir Tomsik said, even though the economy has shrunk for five quarters, the longest contraction since at least 1996, as households and businesses spend less because of Europe’s debt crisis and government austerity.
“Since the weakening of the exchange rate has so far, to a large extent, been compensating the anti-inflationary effects of the local economy, there hasn’t been a need at this moment to take the path that we had agreed on,” Tomsik said. “On behalf of this bank, I cannot say at the moment when or whether any such steps will be needed.”
After three rate cuts last year exhausted the scope for further reductions, the koruna is at the center of policy deliberations as a weaker exchange rate boosts exports that account for about 80 percent of economic output, increases import prices and limits deflation risks.
The Czech currency has lost 4.2 percent to the euro since Sept. 17, the day before central bank Governor Miroslav Singer first said policy makers may sell the currency to meet their inflation goal. It was the fourth-worst performance in that period among major emerging-market peers tracked by Bloomberg.
The koruna has been weaker than the central bank had predicted, and in an update of its macroeconomic forecasts today, the CNB said it sees the unit at 25.6 per euro in 2013, compared with a previous estimate of 25.3. The 2014 forecast was changed to 25.3 per euro from 25, it said. The koruna was at 25.621 per euro at 3:30 p.m. in Prague.
Monetary authorities across the region are easing policy to help boost growth as Europe’s sovereign-debt crisis drags on. Hungary’s central bank cut the benchmark for a ninth month to 4.75 percent on April 23, while Polish rates have fallen 150 points since November to 3.25 percent. Both are record lows.
“We still think the central bank should ease monetary policy sooner rather than later, but we also acknowledge that the board is split over the need for further easing,” Stanislava Pravdova-Nielsen, a Copenhagen-based Danske Bank A/S analyst, said in a note before the meeting. “We do not expect the bank to use the foreign-exchange channel any time soon.”
The Czech Republic doesn’t face a deflation threat that would require currency interventions now, central banker Pavel Rezabek said in an April 23 interview. Interventions should be used only in extraordinary situations and, if conducted, the primary goal would be to “solve a deflation problem,” he said.
“We’re not in a situation to realistically expect deflation in the near future,” Rezabek said. “The risk of deflation has significantly declined, and we can say it may have even been fully eliminated, unless a major shock occurs. We should be careful about using this instrument as long as inflation on the policy horizon isn’t at risk.”
The comments added to signs of a split among board members on the policy outlook after the bank said currency sales would be the next tool should it need to further ease monetary conditions.
While the koruna is weaker now than assumed in the central bank’s February forecast, the economy faces continued anti-inflationary risks as demand is damped by the government’s fiscal consolidation, Tomsik said. The bank raised its forecast for price growth in the second quarter of 2014 to 1.8 percent from 1.7 percent, and in the third quarter of next year to 1.9 percent from 1.8 percent.
Czech inflation was 1.7 percent in March, unchanged from February. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.9 percent, below the central bank’s 1 percent to 3 percent target band.
Prime Minister Petr Necas’s government agreed last week to target a wider budget deficit in 2014 than initially planned in a bid to boost growth. The decision reduces the likelihood of currency interventions, said Mohammed Kazmi, a London-based strategist for emerging markets at RBS.
While policy makers “remain fairly split on whether to use foreign exchange intervention, we do not sense any imminent urgency for further monetary easing, given the recent weakness” in the koruna rate, Kazmi said in an April 25 report to clients.
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