Czech Policy Easing Unneeded If No Deflation Risks, Janacek Says

The Czech central bank doesn’t need to relax monetary policy further in the coming weeks because the economy isn’t facing an imminent danger of deflation, board member Kamil Janacek said.

Janacek commented yesterday in an interview in Prague on economic developments and the monetary-policy outlook.

On the monetary-policy outlook:

“Ceska Narodni Banka is very transparent and has declared it won’t raise rates from the technical zero over a longer horizon, until inflation pressures increase significantly.

‘‘Inflation is below the center of the target range, but the rate is still a positive number and so far there isn’t an imminent danger of deflation. The domestic economy has disinflationary effects, while pro-inflationary risks include food prices and the cost of oil.

‘‘In the current state of the Czech economy, there’s no immediate threat of cost-push inflation that would then filter into demand inflation through wages, as wage growth will stay very subdued for the rest of this year.

‘‘In my view, so far we don’t have all necessary arguments for relaxing monetary conditions further in the coming weeks. It’s still a wait-and-see position for me.

‘‘But, on the other hand, if there are signals of a quickly approaching deflation trap, I’ll be in favor of taking action, even if it meant making a decision in between the regularly scheduled monetary-policy board meetings.

‘‘It wouldn’t be too late to act if risks of deflation are visible. It’s our experience from the past that the transmission mechanism through the exchange rate is considerably faster than through interest rates. It’s empirical evidence and it applies especially in a relatively small and open economy like ours.

‘‘For me personally, the main indicator of deflation risk would be a return to recession, which would mean that aggregate demand in the economy declines again.’’

On the Czech economy:

‘‘Despite second-quarter data showing the end of six quarters of economic recession, I think it would be premature to overestimate this piece of positive news. Even as numbers for industrial output, foreign trade or retail from the past one or two months are encouraging, my experience is telling me to wait for more data to see whether it’s really a turnaround.

‘‘My conclusion so far is that the economy is still at the bottom of the cycle and I’m hoping that it will make the first step upward in the following quarter.’’

On the labor market:

‘‘Risks in the domestic economy include relatively high unemployment and very low job creation. This means that companies have been dealing with the crisis by streamlining their operations. They have spare capacities and are very cautious in hiring.

‘‘Therefore businesses, especially industrial companies, will address a potential increase in foreign demand by raising the utilization of workers they already have.

‘‘Similarly, we can’t be surprised by weak investment when companies have unutilized capacities. Since the late 1990s, employment growth has lagged behind recovery in the industry, construction or behind economic growth in general.’’

On weak investments:

‘‘Anecdotal evidence shows me that businesses are cautious when they have orders for around half a year. Only when orders stretch into a year or year and a half do they start considering investing.

‘‘We can’t expect a quick return of investment into fixed capital in the next few months. Only when investment growth returns, together with exports and recovering household demand, can we expect more stable economic growth of about 2 percent. We have to get used to anemic growth in the coming quarters.

‘‘The positive development is that it’s not only industrial export orders that are showing a double-digit increase again, but domestic orders are also rising by more than 5 percent.’’

On koruna moves:

‘‘For now, the slight improvement in some data isn’t translating into koruna appreciation. The koruna is moving around 25.8 to the euro and exporters aren’t complaining about its strength.

‘‘Even as the koruna rate corresponds to the level in our latest forecast, the forecast also assumes lower market interest rates. This means that with market rates at their current level, the koruna is very slightly overvalued relative to the forecast.’’

On EU banks:

‘‘Europe has so far stayed somewhere in the middle of the road in cleaning and strengthening its banking sector. The European Union seems to be moving one step forward, one step to the side in dealing with the crisis.’’

On global monetary policy:

‘‘The Fed’s exit from the monetary stimulus now would have a neutral impact on the U.S. economy. By contrast, the European Central Bank isn’t even suggesting changing its policy, which is understandable, considering the state of euro-zone economy.’’

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