Interview of Tomáš Holub, Bank Board member
By Jan Lopatka (Reuters 8. 4. 2020)
The Czech central bank is seeking fast approval of a wider legal mandate to buy assets primarily to have tools to provide liquidity and support financial stability, although considering quantitative easing would also be on the table if conventional tools are exhausted, a board member said on Wednesday.
Tomas Holub said the bank was still quite far off any non-conventional tools as it had 100 basis-point room to cut interest rates before reaching zero, and the crown currency's weakening has also relaxed monetary conditions.
The bank has long sought to widen its powers to act in the market by a legal amendment, which was rushed through the lower house of parliament on Wednesday, to have unlimited choice of assets and counterparties to trade with.
Holub said that while the powers could be used for stabilising the government bond market if needed or for quantitative easing, the more pressing matter for the amendment was potential need to provide liquidity to banks and other market participants affected by measures taken in the coronavirus crisis such as planned deferral of debt payments.
"At the moment, the financial stability motivation is more urgent," Holub told Reuters in an interview.
"From the monetary policy point of view we still have 100 basis points before we hit the zero lower bound of interest rates. Monetary conditions have also been quite significantly relaxed by the crown exchange rate weakening."
He said if deflation pressures started to cumulate in a persistent recession, quantitative easing for monetary policy could be considered. "But we are still relatively far from that," he said.
For financial stability purposes, the central bank could use for example mortgage bonds or securitised loans as collateral for providing longer-term liquidity to market participants that needed it, he said.
"We are ready to go this way but we need the legal framework for it," Holub said. "It is a complex legal amendment that should allow us, to paraphrase Mario Draghi, to do whatever is needed in the given situation."
Holub said he would put quantitative easing, which may deliver more policy relaxation by depressing yields on the longer end of the curve by buying bonds, before considering negative interest rates.
"Generally I feel that as an institution we are rather more sceptical than other central banks toward this instrument (negative rates)," he said. "For me yes, asset buying is at a higher place in the ranking, or charts, than negative rate."
The bank has cut interest rates by 125 basis points in two steps over the past month, relaxed capital requirements for banks and eased mortgage lending regulations.
It has also said it was ready to intervene in the foreign exchange market with its 134 billion euro reserves if the crown dropped excessively.
"There can be a level where the negative side-effects of a weaker exchange rate start prevailing over the standard positive effects... At the current levels, we do not se a reason to act."
He said current developments did not require any quick further steps in monetary policy and the bank may wait with next assessment of the situation, although perhaps not all the way until next scheduled policy meeting on May 7.