New Rate Setter Sees One More Year of Koruna Straitjacket

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  • Benda says he sees no reason to shift koruna cap level now
  • Central bank will probably ‘do without’ negative rates

The Czech economic outlook indicates the central bank will be able to end its cap limiting koruna gains in about a year, and policy makers probably won’t have to pursue more unconventional monetary steps, a new member of the rate-setting board said.

Domestic demand is fueling an economic expansion, with an improving labor market and “brisk wage growth” boosting household consumption, according to Vojtech Benda, in his first interview since joining the panel on July 1. The U.K. vote to leave the European Union is a source of uncertainty, but it shouldn’t have a significant impact on the Czech economy in the bank’s 18-month monetary-policy horizon, he said in his Prague office on Friday.

Vojtech Benda

Source: Czech National Bank

Benda, 41, joined the monetary authority as it struggles to revive inflation with near-zero interest rates and a ceiling on the currency limiting its gains to around 27 per euro. With declines in food and energy costs outstripping the impact of the recovering economy, the central bank sees price growth accelerating to its 2 percent target range toward the middle of next year, when its forecast shows it may be able to return to standard policy.

“Projections from the last prognosis seem to be materializing, which means that the forecast of inflation returning to target at around mid-2017 appears to be realistic,” Benda said. “So for now, I don’t see any reason to reassess the level of the koruna commitment or change the expected timing of the exit.”

For a story on the most recent policy deliberations, click here.

The Czech National Bank left the benchmark interest rate at what it calls a “technical zero” of 0.05 percent, where it’s been since 2012, at its last meting on June 30. Like its counterparts across the globe, it added the U.K. referendum to the list of uncertainties but said it would be difficult to be more precise about its impact.

Benda spoke before the country’s statistics office published June inflation on Tuesday showing consumer prices grew 0.1 percent from a year earlier. The reading was in line with analyst estimates and above the central bank’s projection for no increase. The bank said June inflation deviated only slightly from its forecast, which sees price growth accelerating near the end of this year.

The central bank has repeatedly intervened to thwart strengthening in the koruna, buying the equivalent of 968 million euros ($1.1 billion) in foreign currencies in April and May. After moving in a narrow range for almost seven months, the koruna slid to its weakest level since November after the Brexit vote. It traded little changed at 27.037 against the euro as of 8:42 a.m. in the Czech capital.

Benda, who was senior economist at ING Groep NV’s Czech unit and later an adviser to new central bank Governor Jiri Rusnok, said he didn’t see any “upper limit” for the foreign currency reserves.

“Having sufficiently high reserves is a good thing, because we don’t know what kind of pressures the koruna will face in the coming years,” he said.

For the story on new members of central bank’s board, click here.

Before Benda joined the board, the panel repeatedly warned that it may shift the koruna cap to a weaker level if it sees a “systemic” decline in inflation expectations hurting wage growth. While Benda said the bank will watch wage trends very closely, he added that salaries are now increasing at a “slightly quicker” pace than envisaged in the central bank’s last forecast and correspond to productivity growth.

“With nominal wage growth of 4 percent or more, I don’t see any need to discuss the level of the koruna commitment,” Benda said.

The bank board has discussed several times in the past year whether or not to join some global central banks by imposing negative rates to create additional stimulus. Benda said there was only “very limited potential” for sub-zero interest rates to ease monetary conditions, adding that the exchange rate is a far more efficient measure.

“I can theoretically imagine implementing negative rates as a temporary additional tool to support the exchange-rate commitment in case of excessive inflows of speculative capital, although I don’t expect this to happen,” he said. “I can’t rule it out but, at this point, I think we will be able to do without negative rates.”