ECB Stimulus No Automatic Spur of More Czech Easing to Hampl

  • Central bank vice governor sees no need for looser policy now
  • Hampl says currency cap better easing tool than negative rates

It’s far from a given that the European Central Bank’s smaller counterparts will follow Mario Draghi’s lead in delivering new monetary stimulus, according to Czech policy maker Mojmir Hampl.

“There’s no automatic reaction in the sense that central banks in small economies must automatically follow decisions of central banks in big economies,” Hampl, vice governor at the Czech National Bank, said in an interview in his office in Prague on Monday. “We are making autonomous decisions to fulfill our mandate. In this context, I don’t see a reason to loosen policy further now.”

Monetary policies are diverging across Europe in the wake of the ECB’s moves last week that brought its interest rates to record lows, expanded asset purchases and offered a borrowing subsidy to lenders. Denmark’s central bank ignored the ECB cut and left its benchmark unchanged, while Romania said developments in the euro area won’t deter its plans to begin policy tightening.

As the ECB intensifies its fight to prevent the 19-nation currency union’s lackluster economy from slipping into a deflationary spiral, its counterparts in the Czech Republic are under less pressure to follow suit. While the Czech headline price growth rate remains below the central bank’s target and disinflationary pressures from abroad are creating “relatively strong mid-term risks,” the structure of domestic inflation reveals that the demand-driven price growth is developing in line with expectations, according to Hampl.

Economy, Inflation

The Czech central bank has long grappled with the challenge of one of the fastest economic expansions in the European Union and a drag on inflation from cheap commodities, which have kept price growth well below its 2 percent target. Policy makers have repeatedly intervened in the market to prevent koruna appreciation and pledged not to exit their regime of limiting currency gains before 2017.

Scrapping the koruna cap should “ideally happen” once the central bank is considering tighter monetary conditions, according to Hampl. It would be “inconsistent” to provide the expected timing for such a policy change while at the same time thinking about more monetary loosening, said Hampl.

“If I were to consider a further easing of monetary conditions, then I would have to see a worsening of the fundamental picture -- the macroeconomic picture, monetary picture and demand picture,” Hampl said. “And I have to say that’s not what I’m seeing now.”

Easing Wagers

Investors in interest-rate derivatives are betting on Czech borrowing costs dropping below zero after the central bank’s board on Feb. 4 discussed negative rates as a possible tool if more policy easing were needed. Forward-rate agreements fixing future funding costs signal investor expectations that the benchmark rate will be cut by about 16 basis points by end-2016 from current 0.05 percent. That compares with bets on as much as 26 basis points of easing before the ECB’s decision last week.

The Czech koruna has hovered at a level just weaker than the central bank’s limit on its gains, defined as “near” 27 per euro, for four months. It traded little changed at 27.047 against the euro as of 1:36 p.m. in Prague on Tuesday.

The injection of fresh koruna liquidity -- created by converting foreign currencies the central bank buys in market interventions -- is helping to push interbank interest down and delivering additional easing effect for the economy, according to Hampl.

Rate Differential

“I can very well imagine that simply maintaining the foreign-exchange commitment could cause a further decrease in domestic market interest rates, if the differential between negative deposit rates abroad and the positive statutory deposit rate in the Czech Republic attracts more capital inflows,” he said.

The 41-year-old vice governor considers negative rates to be an inefficient tool for the Czech economy, adding that he’d prefer using the foreign-exchange instrument if more loosening were needed.

“The advantage of the foreign exchange commitment is that it’s automatic and unlimited,” he said. “In our economy, negative rates wouldn’t only deliver very little impact, but they also carry many risks, side effects and potential costs.”

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