Czech Central Bank Chief Signals Preference for EasingPeter Laca
Czech central bank Governor Miroslav Singer signaled his preference for more monetary easing as risks of inflation missing the bank’s target eclipse signs of an economic revival.
The Ceska Narodni Banka would keep zero interest rates “for quite a long future” even if monetary conditions were “relatively more relaxed,” Singer said yesterday in an interview at the bank’s headquarters in downtown Prague. With no room left to cut borrowing costs, weakening the koruna is the next tool policy makers may use for easing, he said.
As monetary authorities around the globe exhaust traditional rate cuts and embrace guidance on the path of interest rates, Czech policy makers are vowing to keep near-zero borrowing costs to maintain stimulus. With the economy showing some signs of rebounding from a record-long recession, the central bank is debating whether koruna sales are warranted for the first time in more than a decade to fulfill its price-stability mandate.
“From my point of view, if monetary conditions were relatively clearly relaxed, I would still say that we are going to keep rates at zero in the long-term future,” Singer said. “And I would still say there would be a very low likelihood of any inflationary pressures materializing within the monetary-policy horizon.”
The koruna weakened as much as 0.5 percent yesterday, trading little changed at 25.944 per euro as of 3:34 p.m. in Prague. It has lost 5.4 percent since Sept. 17, a day before Singer said for the first time that the bank may sell its currency.
The central bank is in uncharted territory after cutting the two-week repurchase rate three times last year to 0.05 percent, almost a half point below the European Central Bank’s benchmark, as the $196 billion economy fell into the longest recession since 1996 when current records started.
The Czech currency shifted to the center of policy discussions as its depreciation would help boost the competitiveness of exports and make imports more expensive. The central bank’s next monetary-policy meeting is Aug. 1.
“Honestly, I will start thinking about it next week,” said Singer. “But it seems that for me the question is only how strong the pressures for further relaxing the monetary conditions are. We always smooth out our decisions.”
The economy has shrunk for six consecutive quarters through March as households curbed spending and euro-area crisis weakened demand for the country’s exports, including cars and auto parts.
While some indicators are showing signs that the Czech economy is starting to bottom out, the “qualitative picture” hasn’t changed much since the central bank’s last policy meeting in June, Singer said. A lot of “anti-inflationary risks seem to be materializing,” he said.
Retail sales unexpectedly increased for a second month in June, and a gauge of Czech manufacturing performance rose for a third month. Even as the economic slump deepened in the first quarter, gross domestic product data showed that consumer spending rebounded.
Inflation accelerated in June more than the central bank had forecast, to 1.6 percent from 1.3 percent in the previous month. Price growth relevant for monetary policy, adjusted for the primary impact of changes in indirect taxes, quickened to 0.9 percent from a year earlier after 0.6 percent in May.
“There are still relatively sizable disinflationary risks stemming from the situation in the euro zone in general,” said Singer. “But also there is a possibility that commodity prices may not go up at all, steel prices are under pressure; there are new developments with energy sources, for instance. So yes, I can imagine a lot of things going against inflation.”
Even as the central bank targets headline price growth at 2 percent, with a 1-3 percent tolerance band, Singer and other board members look at monetary-policy inflation alongside other data when considering policy moves, he said.
At the previous policy meeting on June 27, the seven-member board agreed that the need for monetary easing had increased, minutes from the meeting showed. Singer declined to say yesterday whether he was among those advocating an immediate start of interventions at the June meeting.
Before last year’s rate cuts started in June 2012, Singer had backed a motion for an earlier reduction, just to be outvoted by the majority of the board. While monetary easing may be warranted again, it isn’t certain the move will get enough support, according to Nomura International Plc.
The bank board is “very split” and Singer may have only “limited convening power” to sway other members, Peter Attard Montalto, an economist at Nomura in London, said in an e-mail yesterday.
“We have some members who are uncertain of the point of intervention, others who are more hawkish on the outlook,” Montalto said. “We have for a long time been nowhere near intervention as a result.”