Czech Central Banker Sees `Low Probability' of Negative Rates

  • Rusnok says `selective' sub-zero rates could help curb inflows
  • Negative rates in euro area may boost demand for koruna assets

Czech policy makers will probably use negative interest rates only if they need another instrument to deter “excessive” capital inflows, according to Jiri Rusnok, the top candidate to become the next central bank governor.

“We can’t give up that tool, but at the same time I think the probability of it being used is really low,” Rusnok, who joined the national bank’s board two years ago, told a Czech Business Club seminar in Prague on Friday. “And if it is used, it would be to some extent symbolic.”

While several global central banks embraced negative rates to spur inflation, policies are diverging across Europe after the euro-area’s monetary authority last week expanded its stimulus to prevent the currency union from slipping into a deflationary spiral. Denmark’s central bank ignored the European Central Bank cut and left its benchmark unchanged, while Romania said developments in the euro area won’t deter its plans to begin policy tightening.

With the benchmark rate currently at 0.05 percent, central bankers in Prague are debating whether they should use negative rates if more easing were needed to lift consumer-price growth. Governor Miroslav Singer and Vice Governor Mojmir Hampl have warned of risks from negative rates to domestic lenders, saying the existing cap on koruna gains is a better tool.

Efficient Tool

“The exchange rate really works very well for our small open economy,” said Rusnok. “We don’t have any other strong, efficient tool at the moment.”

The central bank may use negative rates as an auxiliary tool that would help defend the limit on koruna appreciation, set at “around” 27 koruna per euro, according to Rusnok. Short-term capital inflows may be encouraged by a higher Czech benchmark rate compared with the euro area, Sweden, Denmark and Switzerland, he said.

Policy makers would seek to mitigate risks for financial stability by exempting existing bank deposits if they imposed negative interest rates, which would only affect fresh capital inflows, according to Rusnok. He said that while the central bank has enough room to accumulate foreign-currency reserves through market interventions, it can’t do so indefinitely.

“Our situation is getting slightly more complicated because our immediate neighborhood has negative rates,” said Rusnok. “This could theoretically put us under unnecessarily heightened pressure to intervene. To deter this speculative pressure and to lessen the appeal, we can’t rule out using negative rates too.”

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