Negative Interest Rates Face Resistance From Czech Policy Makers

  • Singer says he is `not too enthusiastic' about more rate cuts
  • Hampl sees high costs, little benefits of sub-zero rates

Two Czech rate setters voiced skepticism about the benefits of using negative interest rates as a monetary instrument, damping market speculation that the central bank will cut borrowing costs below zero after its board debated such a measure this month.

Governor Miroslav Singer said late on Tuesday he is “not too enthusiastic” about further reducing the benchmark rate, which has stood at 0.05 percent for more than three years. Vice Governor Mojmir Hampl made similar comments on Wednesday, saying negative rates have high costs and little benefits as a policy tool, Reuters news service reported.

“At some point, banks will be hit by low interest rates and people may start cashing out of their accounts,” Singer told a business forum in Prague. “It’s much better to use the tools which have unlimited potential, like the exchange rate, like the QE.”

The Czech debate about additional monetary stimulus follows action taken by some of the major central banks that are struggling to boost consumer-price growth and deter capital inflows. European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda have joined their counterparts in Denmark, Sweden and Switzerland in embracing interest rates of less than zero.

Investors in derivatives markets have been betting on further monetary easing after the Czech National Bank on Feb. 4 delayed an exit from its regime of limiting koruna gains until 2017. The bank board also discussed whether sub-zero interest rates were needed to mitigate the impact of the expanding monetary stimulus in the euro area, which policy makers in Prague see as a risk for their efforts to lift inflation toward the 2 percent target.

Czech forward-rate agreements rose after the latest central bankers’ comments as investors trimmed their wagers that borrowing costs will decline. The FRAs fixing three-month interest in November traded 23 basis points, or 0.23 percentage point, below the Prague Interbank Offered Rate to which they settle, compared with a gap of 26 basis points at the end of last week.

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