No Quick End to Koruna Cap as Singer Sees Debate on Exit Delay

  • Economy still needs loose monetary policy for some time
  • Bank will probably focus on fine-tuning monetary policy

The Czech economy doesn’t need a dramatic change in monetary policy now, and the central bank will probably discuss the prospect of delaying the exit from its regime limiting currency appreciation, Governor Miroslav Singer said.

The economy has been improving since the Czech National Bank weakened the koruna with market interventions and imposed a cap on the currency’s gains two years ago, with positive trends visible in wages and the labor market, Singer said in an interview in his office in Prague on Wednesday. While inflation adjusted for factors outside the direct influence of monetary policy has quickened, disinflationary pressures from abroad and declining energy costs are muting overall price growth.

“We are seeing some changes in the Czech economy, at the same time, we see that it still needs loose monetary policy and it will need it for some more time,” said Singer, 47. “So, we are discussing how to deliver the monetary impulse through fine-tuning the policy. The debate is likely to be focused on moving the exit to a later date, because that’s a reasonable fine-tuning tool.”

Rate setters in Prague have struggled to push inflation toward their 2 percent target as low commodity prices offset the impact of the fastest economic growth in eight years. While Singer reiterated the pledge to keep limiting koruna gains to around 27 per euro until at least the middle of 2016, he declined to speculate whether the regulator may decide to extend the regime into 2017 after it reviews its next inflation and economic outlook at a policy meeting on Nov. 5. The central bank has held its main interest rate at 0.05 percent since 2012.

Singer’s comments follow concerns about downside risks to the inflation outlook voiced by several board members last month. The bank may need to stick to loose monetary policy beyond next year due to disinflationary risks from the global economy, Vice Governor Vladimir Tomsik said on Sept. 2. Board member Lubomir Lizal warned that more easing may be warranted to achieve the inflation target. Jiri Rusnok, President Milos Zeman’s top pick to replace Singer when his term ends next year, said he couldn’t rule out negative interest rates if more monetary stimulus is required.

The economic recovery and speculation that the central bank may scrap the limit earlier pushed the exchange rate toward 27 against the euro in July and August, forcing the central bank to sell the koruna in the market for the first time since it imposed the cap in November 2013. The currency moved away from the intervention level in the second half of September, and traded little changed at 27.102 against the euro at 9:10 a.m. in Prague.

The bank has repeatedly postponed its expected timing of reaching the inflation goal, with its latest forecast from August predicting price growth moving to the 2 percent mark in early 2017. While the headline rate is still deeply below the target, its composition looks better than 12-18 months ago, according to Singer.

“Having said that, core inflation pressures are still not strong enough, which means that keeping monetary conditions relaxed is an appropriate policy stance,” Singer said. “But the need for some dramatic further loosening is certainly weaker than two years ago, and we know we aren’t able to adjust the policy though the exchange rate as delicately as with interest rates.”

The governor also said the bank board can’t avoid a debate about negative interest rates, partly because they have been used elsewhere. That has effectively tightened Czech monetary conditions in relation to countries with sub-zero borrowing costs, he said.

“This is, to some extent, complicating our position, and it is a reason for our debate about negative rates here,” said Singer. “It hasn’t required any policy action so far, but we are aware of this. At the same time, there’s been a reaction on the state-bond market, where some yields have declined to negative levels, which itself has reduced the need for monetary-policy action.”

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