By Peter Laca (Bloomberg 24.10.2012)
The Czech central bank sees risks in incomplete proposals for a European banking union that may change national supervisory powers over the financial industry, board member Lubomir Lizal said.
Lizal commented on Europe’s debt crisis, Czech economic developments and the monetary-policy outlook in an interview in Prague yesterday.
On debt crisis and banking union:
“The main goal of efforts in Europe is to install a credible lender of last resort, because the governments in the troubled countries cannot fulfill this function.
‘‘This means more involvement in public budgets. If this cannot be performed directly by the governments, what is needed is to find another possibility of doing it from public budgets.
‘‘The primary goal is to break the link between the banking sector holding problematic government debt, and the public sector which, because of its own problems, isn’t able to rescue the banking sector.
‘‘The risks from proposals for a banking union are that they’re not presented in a complete form. The proposal addressing the issue of relations between the home and host regulators include potential risks. For instance, the European regulator is seen having different powers than the national regulators, while the national regulators will still carry the fiscal responsibility for eventual problems.
‘‘Our view is that the proposal should be presented in a complete form to allow analysis of all potential benefits, risks and costs.
‘‘Unequal positions of the regulatory authorities inside and outside the euro zone could create situations in which the monetary-union bloc could outvote those outside the bloc.
‘‘Moreover, views of what are systemically important banks will differ in a small, open economy and in a larger economy. If there is an institution that might not be seen as systemically important for the European regulator, its subsidiary may be seen as systemically important in the Czech Republic or some other similar country.
‘‘What I consider crucial for financial stability is that the banking group not only meets the requirements overall, but that it also meets the requirements in every country where it has operations.’’
On Czech economy and monetary policy:
‘‘We are trying to communicate that the economic situation isn’t as pessimistic as may be perceived by the public or the companies.
‘‘The latest step to lower the interest rates was reflected in the market interest rates. To me, the effect was there, and the transmission mechanism is working even with the current low rates.
‘‘Our decision was in line with the central bank’s forecast, and the effect was also in line with the impact that was assumed in the forecast.
‘‘The current forecast assumes another rate reduction. I don’t think the next forecast will be dramatically different from the current one. This means there shouldn’t be a change in the trend, although there may be a change in the timing.
‘‘If the new forecast isn’t very different from the previous one, then more relaxed monetary conditions will probably be warranted.
‘‘The transmission mechanism has been working so far, so I don’t see a reason not to use interest rates again, if we agree that it is needed. For me, zero rates aren’t a problem. It is neither a psychological nor a technical barrier.
‘‘My perception is that extra policy measures should be used when the main tool cannot be used anymore. And we still can use it.
‘‘The foreign-exchange channel seems to be the next most effective instrument in terms of an impact on prices and in terms of relaxing monetary conditions. It is also an instrument that we know the best, an instrument that is the easiest to monitor and regulate.
‘‘Inflation expectations are anchored near the inflation target, which reflects the credibility of the monetary policy.’’
Czech Rates Should Go to Zero Before Selling Koruna, Lizal Says
The Czech central bank should cut interest rates to zero before moving to weaken the koruna as the economy may warrant further monetary easing, board member Lubomir Lizal said.
Policy makers in Prague are preparing tools for relaxing conditions after cutting the benchmark two-week rate to a record low 0.25 percent in September, half a point below the euro-area rate. With the economy in its second recession since 2009, the bank board agreed to use the koruna should it need to ease policy beyond what another rate reduction would achieve, Governor Miroslav Singer said last month.
Monetary authorities in eastern European Union members are following central banks in the U.S. and U.K. in easing policy to tackle an economic slowdown as Europe fights a debt crisis. The Czech economy is suffering from weak domestic demand after the government cut investments and raised taxes to trim the budget gap. The central bank forecasts another rate cut and its next outlook probably won’t be very different, Lizal said.
“The transmission mechanism has been working so far, so I don’t see a reason not to use interest rates again, if we agree that it’s needed,” Lizal said in an interview yesterday. “My perception is that extra policy measures should be used when the main tool cannot be used anymore. And we still can use it.”
Lizal was among five of seven board members who voted for the September rate cut, and he also backed the previous quarter- point reduction in June. The bank will hold its next meeting on Nov. 1, when it will also present its new forecast.
No Barrier
“For me, zero rates aren’t a problem,” said Lizal, 43. “It is neither a psychological nor a technical barrier.”
Czech gross domestic product fell 0.2 percent in the second quarter from the previous three months, the third consecutive contraction, after consumers responded to the worsening economic outlook by spending less.
“We are trying to communicate that the economic situation isn’t as pessimistic as may be perceived by the public or the companies,” said Lizal, a Prague native appointed to the board last year by President Vaclav Klaus.
The Czech Republic didn’t have to bail out banks during the global financial crisis following the collapse of Lehman Brothers Holdings Inc. in 2008 and its public debt at about 40 percent of GDP is half of the EU average. The government is seeking to cut the fiscal deficit to less than the EU’s limit of 3 percent of GDP next year.
Inflation Factors
Consumer prices grew 3.4 percent in September, less than the central bank’s estimate of 3.5 percent. The inflation rate has been above 3 percent this year because of factors outside the influence of monetary policy, including a sales-tax increase and global commodity costs.
Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 2.1 percent in September, according to central bank data. The bank targets the monetary-policy inflation rate at 2 percent and sees it at 1.5 percent in the third quarter of next year, according to its latest forecast from August.
“The current forecast assumes another rate reduction,” Lizal said. “I don’t think the next forecast will be dramatically different from the current one. This means there shouldn’t be a change in the trend, although there may be a change in the timing.”
While the country maintains a foreign trade surplus, export growth was the slowest since the start of 2010 in the second quarter as the euro area’s crisis curbed purchases of electronic goods and cars. Exports account for three quarters of Czech GDP, with the 27-nation EU buying 80 percent of them, including cars from Volkswagen AG’s unit, Skoda Auto AS.
Koruna Strength
The Czech koruna has gained 0.3 percent to the euro since Sept. 27 when Governor Singer said the bank may use “the exchange-rate channel” next to relax monetary conditions. The currency is 2.4 percent stronger to the euro so far this year.
The central bank last stepped into the market to weaken the koruna 10 years ago. It bought $438 million and 444 million euros ($574 million) in September 2002, records on its website show, following the koruna’s 9.5 percent rally that year.
Unlike the Swiss central bank, which set a cap last year on the franc to stop its gains from hurting the country’s economy, policy makers in Prague haven’t indicated any exchange rate at which they may start to sell the koruna.
“The foreign-exchange channel seems to be the next most effective instrument in terms of an impact on prices and in terms of relaxing monetary conditions,” Lizal said. “It is also an instrument that we know the best, an instrument that is the easiest to monitor and regulate.”
