- Czech central bank chief `skeptical' about rates below zero
- Temporary negative rates may be useful on some market segments
The Czech central bank isn’t convinced it should follow some of its major global counterparts in introducing negative interest rates as policy makers debate how to deter capital inflows and spur inflation, Governor Miroslav Singer said.
Cutting borrowing costs to below zero temporarily, if it were to affect only “some segments” of the market, could be useful, but the central bank in Prague isn’t sure about other consequences on the economy, he told Bloomberg Television in London. The regulator calls the level of its main rate, now at 0.05 percent, “technical zero.”
“We are not that hot about going into negative interest rates,” Singer said in an interview on Thursday. “Negative interest rates bring us really sort of behind the mirror. It’s a new world, we don’t really know exactly what’s going to happen.”
Singer’s comments underscored the Czech National Bank’s dilemma -- how to tackle the competing factors of one of the fastest economic expansions in the European Union and inflation that cheap commodities have helped sink well below the 2 percent target. As the European Central Bank’s quantitative easing channels more capital into Czech assets, rate setters in Prague debated last month whether introducing negative rates could be suitable.
The central bank has repeatedly intervened to defend its Swiss-style limit on koruna gains, which it imposed in 2013 to fend off deflation risks. While the board didn’t vote on negative rates at its last policy meeting on Feb. 4, investors in interest-rate derivatives have been increasing bets on negative borrowing costs in the Czech Republic.
The forward-rate agreement fixing three-month interest in nine months fell to 24 basis points below the three-month Prague Interbank Offered Rate to which it settles on Thursday, compared with trading on par at the beginning of 2016. The Czech koruna has hovered just weaker than the central bank’s limit on its gains, defined as “near” 27 per euro, for four months. It traded little changed at 27.053 against the euro as of 2:57 p.m. in Prague.
With euro-area inflation once again below zero and concerns mounting over the state of the global economy, ECB President Mario Draghi and his colleagues are considering whether the bloc needs more monetary impetus. The chief concern is that negative interest rates, especially if cut further, might squeeze banks’ profitability to the extent that they pull back on lending.
Erste Group Bank AG, which owns the largest Czech bank in terms of number of clients, is already suffering from negative borrowing costs, according to Chief Executive Officer Andreas Treichl.
“It’s the worst for us,” Treichl said in a March 1 interview on Bloomberg Television. “Because we’re a retail bank, we have about 16 million clients. Most of them are relatively low income, and they are badly hurt by the negative rates. What’s bad for our customers is bad for us.”
Officials within the ECB are discussing potential tools that could be used to enhance monetary stimulus in the euro zone without hurting lenders, according to people familiar with the deliberations.
While Singer has repeatedly said his institution doesn’t have to align its monetary approach with euro-area policies, decisions taken in Frankfurt influence developments in the Czech economy. He’s nearing the end of his time at the helm of the Czech National Bank -- his final term expires on July 1 -- and President Milos Zeman has picked board member Jiri Rusnok as a preferred successor.
“It may be that we may not be able to differ that much in some segments from the ECB, but we will have to wait and see,” Singer said. If negative rates “are used carefully for a limited period of time, if they influence only some segments of the market, OK, fine.” But when they enter the real economy, “we do not know what the other consequences are, and I think that there are other tools to be used as well.”