By Peter Laca (Bloomberg, 19.3.2013)
The Czech economy isn’t in danger of falling into a deflationary spiral now that would warrant the first koruna sales in a decade to further relax monetary conditions, central bank Vice-Governor Mojmir Hampl said.
After cutting borrowing costs three times last year to effectively zero, the central bank is in uncharted territory as it debates whether to engage in currency interventions amid a record-long recession. The $217 billion economy is contracting as households and businesses spend less due to government austerity measures and the euro area’s debt crisis.
The bank’s forecast for a return to economic growth and inflation near the target in 2014 is realistic, even as recent data haven’t signaled a revival in domestic demand, Hampl said in an interview in Prague yesterday. Koruna sales to loosen monetary conditions would be needed if there is a realistic threat of deflation, he said.
“For me personally, a trigger for interventions would be the moment when I see a highly probable risk of a long-lasting, devastating deflationary spiral,” said Hampl. “From the current perspective, I personally don’t see such a strong risk yet. It can’t be ruled out that this risk will appear in the future, but I don’t see it materializing for now.”
Koruna Weakens
The koruna has weakened 2.2 percent this year, to 25.664 to the euro as of 10:00 a.m. in Prague, the fourth-worst performance in the period among emerging-market currencies tracked by Bloomberg. It has lost 4.4 percent against Europe’s common currency since Sept. 17, a day before central bank Governor Miroslav Singer first said the central bank may use currency sales to ease monetary conditions.
The Czech inflation rate dropped to 1.7 percent in February from 1.9 percent in January, which was below the central bank’s 2 percent target and an identical estimate for the month.
Fourth-quarter gross domestic product shrank 0.2 percent from the previous three months, marking the fourth consecutive quarterly decline. Output fell 1.7 percent from the final quarter of 2011, the steepest decline in three years.
“I really can’t say that I’m seeing some clear, visible signs of economic recovery, especially in domestic demand,” said Hampl. “Our assumption is that we are now bouncing at the bottom of the cycle, though this bouncing may be at slightly deeper levels than we had expected. The dilemma I see now is whether this really is the bottom, or whether the economy will drop a little further and only then bounce back.”
Household spending fell 3.5 percent in the full year, the first decline since 1998, according to statistics-office data. Gross capital creation decreased 3.1 percent last year, the most in three years.
Inflation Target
The central bank, which targets inflation, left the two- week repurchase rate at 0.05 percent for a second meeting on Feb. 6, almost three-quarters of a percentage point less than the euro-area benchmark.
The bank’s forecast implies that koruna sales may be needed in the second half of the year and policy makers will debate again at the next monetary meeting on March 28 whether to start the interventions, Singer said in an interview with Euro magazine published on March 4.
The central bank in February cut its economic forecasts for 2013 as the government’s austerity measures continue to damp demand. It sees 2013 GDP contracting 0.3 percent this year, before growing 2.1 percent in 2014. It expects inflation at 1.7 percent in the first and second quarters of next year.
More Pessimistic
“Our forecast appears to be quite realistically describing the situation, but the question is whether the data are now confirming this picture, or whether they’re shifting in a slightly more pessimistic direction,” Hampl said. “It seems to me the data are slightly, and I would emphasize the word slightly, more pessimistic.”
If the bank agrees to start interventions, the purpose would be to return inflation to its target rather than boost exports, which already account for 80 percent of GDP, according to Hampl. Even as demand abroad for products such as Skoda Auto AS cars has weakened, the main snag for the economy is domestic consumption, he said.
“If the problem is domestic demand, then the concept of currency wars simply doesn’t rhyme with it,” Hampl said. “We aren’t talking about boosting the share of exports on our GDP to 90 percent, to 100 percent or to 110 percent.”
Czech Central Banker Hampl Sees No Deflation Danger for Economy
Czech central bank Vice-Governor Mojmir Hampl doesn’t see a risk of “devastating” deflation that would justify koruna sales.
Hampl spoke about economic outlook and monetary-policy measures in an interview in Prague yesterday.
ECONOMIC TRENDS:
“I really can’t say that I’m seeing some clear, visible signs of economic recovery, especially in domestic demand.
‘‘The structure of our GDP, inflation and developments in key interest rates abroad, all of these factors are heading in a slightly anti-inflationary direction.
‘‘Our assumption is that we are now bouncing at the bottom of the cycle, though this bouncing may be at slightly deeper levels than we had expected.
‘‘It’s hard to see clear signs of recovery. That doesn’t mean that the picture I’m seeing is dramatically different from what our forecast is showing, it’s just a little more pessimistic.
‘‘The dilemma that I see now is whether this is really the bottom, or whether the economy will drop a little further and only then bounce back.
‘‘It’s evident that pro-inflationary pressures are not visible in the current inflation data. Domestic demand remains subdued and it’s having a disinflationary effect. This is visible in the structure of GDP and is also visible in the structure of inflation.
‘‘Our forecast appears to be quite realistically describing the situation, but the question is whether the data are now confirming this picture, or whether they are shifting in a slightly more pessimistic direction. It seems to me the data are slightly, and I would emphasize the word slightly, more pessimistic.’’
INTERVENTION TRIGGER:
‘‘We are in a unique situation because any further monetary-policy action would mean employing a tool that’s different from what we have used until now.
‘‘It’s still a valid premise that if it’s necessary, the exchange rate would be the next tool for the central bank to use to ease monetary conditions.
‘‘The question is what would be the trigger for using this tool. Interventions have both advantages and disadvantages and it’s very important to assess the potential costs and benefits of such strategy.
‘‘For me personally, a trigger for conducting interventions would be the moment when I see a highly probable risk of a long- lasting, devastating deflationary spiral.
‘‘From the current perspective, I personally don’t see such a strong risk yet. It can’t be ruled out that this risk will appear in the future, but I don’t see it materializing for now.
‘‘The exchange rate is a tool which, unlike interest rates, isn’t solely in the central bank’s hands because it’s also influenced by the market forces. If monetary conditions ease because of factors that that are outside the monetary authority, and the central bank considers such easing as corresponding to what is needed to meet its goal, then, obviously, no action is needed.’’
CURRENCY WARS:
‘‘If interventions are used as a direct tool to influence inflation, the aim would be to stabilize inflation near the target, to stabilize inflation expectations, and it wouldn’t be to make inflation jump somewhere high above the target. The aim couldn’t be to destabilize inflation expectations of households, businesses or of the financial markets.
‘‘If we decided to use interventions, then it would be only for meeting our goal of price stability, it wouldn’t be aimed at making life easier for exporters or to boost export competitiveness.
‘‘If we look at the structure of GDP, then exports are the part that is still performing, the competitiveness isn’t the problem. The fundamental problem is the domestic demand.
‘‘If the problem is domestic demand, then the concept of currency wars simply doesn’t rhyme with it. We aren’t talking about boosting the share of exports of our GDP to 90 percent, to 100 percent or to 110 percent.’’
