Czech Central Banker Says Economy Not Facing Deflation

The Czech economy doesn’t face deflation risks that would warrant further easing of monetary conditions by foreign-exchange interventions to weaken the koruna, central bank board member Pavel Rezabek said.

Rezabek spoke about Czech economic developments and monetary policy in an interview in Prague yesterday.

On the EU’s economy:

“Economic links with the European Union are a dominant feature of the Czech economy. Czech economic growth is roughly similar to that of the European Union’s.

‘‘One of the negative factors for the European economy is over-leveraging, and the expected de-leveraging doesn’t signal any robust growth in the near future.

‘‘Furthermore, the balance sheets of some European banks still contain assets that aren’t exactly good quality, so this is an issue that still needs to be solved.

‘‘Without a return of full confidence to the financial sector, confidence in public finances and a subsequent decline in unemployment, we will experience a relatively long period of time when growth isn’t robust in Europe. We have moved closer to growth, but it’s unlikely to be robust because of the need to finish consolidation in the fiscal and financial sectors.

‘‘The Czech Republic itself also isn’t registering any significant impulses that would indicate a changing trend. There are some positive signs, but these aren’t strong enough to be the basis for any major conclusions at this point.

‘‘Household demand is affected by negative sentiment, and we are still waiting for some impulse that could improve this sentiment. We have seen slight improvement both for households and businesses in recent past, but the data are still relatively weak.

‘‘While the foreign-trade balance is showing a solid surplus, this is partly a result of imports declining more than exports, which only underscores the fact that we still don’t see any strong impulses for an economic turnaround.’’

On koruna risk:

‘‘I see a little bit of risk for the Czech koruna’s exchange rate because we are still expecting a period of dividend outflows, which are bigger than foreign-currency inflows into the Czech Republic. It’s a significant number, totaling roughly about 150 to 200 billion koruna a year, and this is offset only by foreign-trade surpluses and investment inflows.’’

On the economic forecast:

‘‘I personally don’t expect any major changes in the GDP forecast in the near future. The signals from the real economy are still weak to indicate a significantly better outlook. 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.”

On monetary settings:

“The debate about whether to proceed with more easing of monetary conditions has been going on for some time, and the horizon is gradually moving forward. I personally consider this to be a positive result as the 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.

‘‘As a result, the exchange rate has moved to more realistic levels and shifted away from the appreciation trend. The exchange rate is now reflecting the fundamentals of the Czech economy and the fiscal situation more realistically.

‘‘From the current perspective, the difference between the market interest rates and the potential need for a further decline, as signaled in our prognosis, is relatively small.

‘‘So for me, this isn’t a signal for potential interventions yet. I’m personally quite careful about interventions as it’s a complex issue and we always need to assess all aspects of it.

‘‘Interventions have a significant impact on the economy and I’m always asking how big an effect they will have, how long this effect will last and what is the potential exit. Every intervention has its costs and benefits, and it causes market distortions.

‘‘Potential interventions would be conducted primarily to solve a deflation problem. We are not in a situation to realistically expect deflation in the near future. The risk of deflation has significantly declined, and we can say it may have even been fully eliminated, unless a major shock occurs.

‘‘An extraordinary step should only be taken in an extraordinary situation, and in my view, interventions would have to be a reaction to deflation, to a risk that on the policy horizon, we wouldn’t see any other way to return to the inflation target. We should be careful about using this instrument as long as inflation on the policy horizon isn’t at risk.’’

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