Czech Policy Maker Says Koruna Intervention UnwarrantedPeter Laca
The Czech Republic doesn’t face a deflation threat that would require the first koruna sales in a decade to stimulate the recession-hit economy, central banker Pavel Rezabek said, underscoring a split among policy makers.
The Ceska Narodni Banka, which cut borrowing costs three times to effectively zero last year, is in uncharted territory as its board considers currency intervention amid the longest recession since at least 1997. The $217 billion economy is shrinking as households and businesses spend less due to Europe’s debt crisis and government austerity measures.
The decline in market interest rates assumed in the central bank’s forecast is “relatively small” and isn’t a signal for entering the foreign-exchange market now, Rezabek said in an interview in Prague yesterday. 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.”
Rezabek’s comments add 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. A weaker koruna would boost import prices and help exports, which make up 80 percent of the economy.
Disinflationary pressures remain “relatively strong,” Deputy Vice-Governor Vladimir Tomsik said in an interview with Ceska Pozice news website published today. While the koruna is weaker now than assumed in the central bank’s last forecast in February, the economy faces new anti-inflationary risks, Tomsik said, adding that he couldn’t say yet whether quick action by the central bank is needed.
The koruna has lost 5.3 percent to the euro since Sept. 17, the day before central bank Governor Miroslav Singer first said the central bank may sell the currency to meet its inflation goal. It was the fourth-worst performance in that period among major emerging-market peers tracked by Bloomberg.
The Czech currency gained as much as 0.2 percent today, trading unchanged at 25.925 per euro as of 4:25 p.m. in Prague. It touched its weakest intraday level in 17 months yesterday at 25.991 per euro.
The bank kept the two-week the repurchase rate at 0.05 percent for a third meeting on March 28, almost three-quarters of a percentage point less than the euro-area benchmark.
Monetary authorities across the region are cutting borrowing costs to boost growth as Europe’s sovereign-debt crisis drags on. Hungary’s central bank reduced the benchmark for a ninth month yesterday to 4.75 percent, while Polish rates have dropped by 150 points since November to 3.25 percent. Both rates are record lows.
The koruna “has shifted away from the appreciation trend and the exchange rate is now reflecting the fundamentals of the economy and the fiscal situation more realistically,” Rezabek said. “Financial markets are now showing better understanding of the Czech economy, taking into account not only the fiscal consolidation but also the declining real economy.”
Czech inflation was 1.7 percent in March, unchanged from February. The central bank had forecast annual inflation at 2 percent in March, the same as its target. 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.
Fourth-quarter gross domestic product shrank 0.2 percent from the previous three months, marking the fourth consecutive quarterly decline.
The central bank in February cut its economic forecast for 2013 as the government’s austerity measures continue to damp demand. It projects GDP contracting 0.3 percent this year before growing 2.1 percent in 2014. The inflation rate is seen at 1.7 percent in the first and second quarters of next year.
The next outlook, which the bank will present when it holds its next policy meeting on May 2, shouldn’t bring major revisions of the growth forecast, Rezabek said.
“The signals from the real economy are still weak to indicate a significantly better outlook,” he said. “On the other hand, I’m cautiously optimistic about the outlook for manufacturing industries, especially for the second half of the year, so that’s why there shouldn’t be a large revision toward a deeper contraction.”
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